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What to Do With an Oversold VIX?


The needle is still pointing north.

Remember all the way back to that Dystopian world we inhabiteed last Thursday? Markets tanking, options screaming. Dogs and cats living together.

And the VIX, ah the VIX. It got considerably overbought, at least via the basic metric of it's 10-Day Simple Moving Average. To refresh, the VIX generally mean reverts, so when it gets stretched 10% in either direction from it's 10-Day SMA, it's considered overbought (oversold) and likely to snap back, while in turn signaling the market itself may be oversold (overbought).

But take a look now:

Not only are we not overbought anymore, we're on the cusp of being oversold. All we need is a move below 24.

I personally don't use these "VIX Rules" as a trading signal, but rather as a window into the intermediate-term market backdrop. The selloff pretty much stopped in its tracks on the overbought VIX, that's a pretty good sign that the needle is still pointed north. If we get officially oversold here, will that halt the rally?

We'll see, but my pre-anticipation guess is that it won't.

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