Friday, August 22, 2014

Good confirmation indicator of market bottoms

One good indicator of market (as measured by S&P 500 index) bottoms is the state of VIX futures contango. Normally, the front month contract is lower than subsequent months. During market declines, the value of front month and possibly other near months (front month +1) rises much faster than farther months until they all nearly converge, or the front month value exceeds farther months. When this occurs, the market is usually making a short term bottom.This is shown on attached charts. The top chart is the S&P 500 index, the bottom is several VIX Futures (Jan 14 through Nov 14). Note, to load expired recently expired VIX futures, add a ^1 to the symbol. For example, VXZ3^1 will load the Dec 2013 contract.Of course, a trading decision should not be made based on this indicator alone. One should combine with other studies (breadth, oversold, etc) before executing trades. See charts below:

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