Pretty slow day for me, I'm babysitting a couple short term positions as well as making sure my theta positive positions remain as such, so what better time to rant then now?
I've been meaning to write this post for a while and it will be quite a handy reference when trying to prove people wrong on the internet.
Now don't get me wrong, the VIX is a great tool to gague sentiment in the markets. And a couple trendlines here or there are nice too. But basing trading decisions off of any techincal analysis on the VIX is just plain silly.
And this goes back to the philisophical foundation for technical analysis. WTF is it and why does it work?
Price is the discovery mechanism that truly measures supply and demand in a market. There are certain levels in which supply exceeds demand (price goes down) and vice versa. Technical analysis tracks and (hopefully) anticipates areas where there is a supply/demand imbalance-- and that shoiuld give you an edge.
So what is the VIX? Is there an inherent supply and demand in this chart? Well, you can't actually trade the VIX. The VIX is a statistic that is supposed to estimate the implied volatility of the SPX 30 days out; more formally it's "the square root of the par variance swap rate for a 30 day term initiated today."
The only inherent supply and demand is essentially the "insurance" option players are willing to purchase for certain options on the SPX chain.
So the number you see charted on your screen is not the discovery mechanism for supply and demand; rather, it's a derived calculation. With our assumption that TA works only on supply and demand, then using TA on the VIX will not yield the expectancy you may think.
Of course, a couple caveats: now we've got VIX futures, VIX options, VIX binary options, and now the VXX, and I suppose you could make a case for those; but who is leading whom when it comes to price? That might be for another discussion.
Also I reserve the right to change my opinion at any time.