Fly Fishing the Stock Market: How to Search for, Catch, and Net the Market's Best Trades

ANALYTICAL TOOLS AND STEPS

When I approach my analysis of the markets, my first objective is to evaluate the big picture in terms of the general market's status. Is it rising, falling, or flat? What is the likelihood of that condition continuing or changing? Then I assess the strength of stock groups, followed by individual stock analysis. The sequence of tools listed here helps me refine my final focus to low-risk/high-reward trades that are in sync with the direction of the market.

VIX

The first step of my homework is to assess the general market conditions to decide whether I should be bullish or bearish and to what degree. Only then do I turn my attention toward searching for individual stocks. I evaluate MACD and the Impulse system for market indexes and then I bring in VIX.

VIX is the ticker symbol for the Chicago Board Options Exchange Market Volatility Index. (VXX is the symbol of the ETF proxy.) It measures the implied volatility of the S&P 500 Index options. Many refer to the VIX as the “fear index” because of its sharp advances when markets are gripped by panic. Introduced by Professor Robert Whaley in 1993, VIX measures the market's expectation of volatility over the coming 30-day period.

I like the volatility index for its mirror-image correlation to the general market. If the market is showing nervous selling (fear), then VIX or VXX usually displays strength. When VIX surges, it usually accompanies or forecasts serious weakness in the equity markets. Conversely, when ...