A Batch of VIX Homebrew

"Price changes are not independent of each other. Research over the past few decades, by me and then by others, shows that many financial price series have a "memory", of sorts. Today does, in fact, influence tomorrow."

~Benoit Mandelbrot, The (Mis)Behavior of Markets


"When you come to a fork in the road, take it."

~Yogi Berra


I'd rather share a tree branch with an angry Jararaca than be on the wrong side of increasing market volatility. Take a look at the chart below. It shows the difference between the daily highs and lows of the NASDAQ for the last three years.



The chart is not interactive but if you were to draw a vertical line from the volatility line in the bottom half of the chart up to the NASDAQ price line you would notice that the volatility increases during the downtrends, and becomes a little more 'orderly' during uptrends.

Now, lets strip away all that magenta 'noise' and replace it with 20 day and 50 day moving average lines.



The graph sort of resembles the VIX which is the CBOE volatility index.

This is by no means a leading indicator or prediction tool but the crossing of the 20 day MA and the 50 day MA does a fair job of signaling a change of direction during this time period. (20 MA crossing the 50 MA from above to indicate an impending uptrend; 20 MA crossing from below to indicate an impending downtrend).

The timing for the most recent downtrend was especially good. The CMI 2.0 is taking the weekend off to soak up some of this homebrew for future consideration.