Made the call...

Yesterday I was not liking how the market was looking early on in the day. Too many trades were going through that gave me the feeling that some big money was quietly looking for the exit.

I sold my open positions yesterday and locked in the gains up to that point. I did not want to see them evaporate in what was shaping up to look like a trap for the bulls. Even though the market ended the day yesterday up it still looked like a trap. And today that feeling of a trap was evidently true. The bears came out of hiding right as the market opened and ran off with the bulls lunch (money)!



This morning I said as the market opened that today was a day to stay out of the markets. That the volatility would spike today. And it did. So what is this volatility (which we measure by charting the symbol VIX)?

Volatility is the measure of the tendency of a market or security to rise or fall sharply within a short period of time. It is typically measured by the standard deviation of the return of an investment. Standard deviation is a statistical concept that denotes the amount of variation or deviation that might be expected. So what is this VIX thing?

The VIX is a measure of the volatility of options prices on the Chicago Board Options Exchange (CBOE). The VIX, even though is a measure of options pricing has become a popular gauge for the overall markets' volatility. And we can use it to give us a visual presentation of just how volatile a market is. In general when the VIX goes up then the markets are more likely to have wild price swings.. or even a downright sell-off. When the VIX is low the market is considered 'safe' and investors are more prone to enter a trade when they feel it is safe.

Think of VIX as an earthquake Richter scale. When it goes up then everything starts shaking, and crashing down! When the VIX is low everything is safe and stable.

As an example. If you were to apply the formula that makes up the VIX to your certificate of deposit at your local bank which offers a fixed rate of return you know what the volatility measurement would be? Zero of course. If you have a rate which is locked and can not change then there is no deviation and subsequently a zero volatility.

There are three variations of the volatility indicators

• VIX tracks the volatility of options within the S&P 500


• VXN is for the Nasdaq 100


• VXD is for the Dow Jones Industrial Average

But the VIX has become the most popular for traders to gauge the overall market volatility. The chart below shows the relationship between the VIX and the S&P 500 SPX

Notice on the chart that the S&P 500 index (red) takes a dive when the volatility (blue) spikes. Day traders love a little volatility in their coffee each day. But for us swing traders and position traders too much volatility can play havoc with our setups. So the smart thing for us to do is to wait out the storm. When the market settles down then we make our moves. And when an earthquake hits we duck and cover and hold our chips close!

Fp80