Monitoring for a somewhat rare VIX buy/sell signal (Using Bollinger Bands)

This thread is just for fun and to test the VIX buy/sell signal I read about a few years ago. The signal and trigger has three main steps or criteria to it. You need a daily chart of the VIX (Volatility Index) with the default bollinger bands.

1. First off your looking for a VIX candle to close outside of the bollinger bands. I seem to notice the signal is even more effective if you can get an entire candle body to form outside of the lines (both open and closing prices).

2. Once you get the candle that closes outside of the bands, then the actual signal doesn't form until you get a candle to close back inside the bands.

3. Once you have the signal, the final thing to look for is the trigger. Wherever the VIX closed back inside of the bands from step 2, that's the trigger line, and basically you're just looking for the next VIX that closes past that line.

I probably did a poor job of explaining the signal and trigger, but once you get the concept it's very easy. Yesterday's (March 13) VIX candle did indeed close below the lower bollinger band, and in fact it also opened below it as well. That's a good way to check off the first step in the checklist, with the entire candle body forming below the lower line. Today the VIX is looking strong and at the moment is trading back inside of the bands, so I'll be keeping my eye on it and see where it finishes the day. It may not be today, but basically I'm watching to see the next solid close back above the lower line. Once we get that close back inside the bands, then the last thing to do will be to wait for the trigger (a VIX close higher than the first close back inside the bands).

So right now we're in the process of seeing if we'll get a VIX buy signal, which is a signal to sell the broad market (volatility and bearish moves tend to go hand in hand). Depending on when or if this signal sets up successfully any time soon, I'll keep this thread updated and we'll see how market responds.  I like that the markets are slightly green but the VIX is chugging along nicely, we'll see if that's a sign of weakness to come.

On a related note, in the event that we get a nice fat signal from the VIX here, does anyone have any top-heavy dogs they're following (tempting stocks to shorts)? Anything that looks especially weak or looks like would not hold up well if the market corrected?

I thought for sure VIX was going to close around 16 but it sold off into the close. However it did still close clearly back inside the bands, so I think it's safe to say we have the signal, now it's time for a potential trigger. We need to see a close on the VIX higher than today's close, once we have that it's a triggered setup. Once the setup has been triggered, from what I know the ensuing move (in this case market down/ VIX up) tends to take place (start) in the following week.

Quote:

Originally Posted by rando 

I like this concept, and have been watching the VIX for this type of signal for a while now, probably around a year. The part of this method I do not agree with is the trigger. It seems better to use a close outside of the bands as a signal. The confirming close as trigger is probably a reflection of a broader buy/sell strategy which makes sense for most equities/instruments, but with VIX, it's practically deathly allergic to residing outside of the bands. In fact, if you backtest the strategy of simply buying on the close when it closes outside of the bands, then doubling down if the next open is lower, I'm very confident the overall performance of the strategy would do substantially better. Of course, this thread has not gotten to the exit strategy, so maybe I should have held my breath, as it is possible my idea would lead to too many cases of being stopped out... but without checking the chart, my gut is telling me that the false signals have either not been there at all, or have been greatly outweighed by extra profits from jumping in at the signal, not the trigger as described in the first post.
The VIX sell signal is also interesting, as VIX loves bollies and doesn't want to be above or below. After last Tuesday's selling, I was out of town without my wonderful den full of charts, and felt the selling would continue. Then I browsed over to stock charts website and drew up VIX daily. I saw the close nine cents under the upper bollie, went straight to HSM to pretty much withdraw almost all of my bearish bias just based on that, and sure enough 3-4 days later we were pressing the lower bollie. It's quite amazing how the VIX and bollies are like gin and olives.

Thanks for the input. As for timing the trigger, I'm just following what I've read, but I like your more aggressive approach. Right now I'm more or less just trying to experiment here, so the feedback is much appreciated.

It wasn't much, but it did indeed close above yesterday's close. I guess this is where the subjective nature of trading comes into play. Do you wait for a stronger signal or just take this one?

I say it's good enough. Let's see if the market starts to sell off any time soon.