THE WEATHERVANE: A MARKET TIMING MONITOR

A weekly chart combining the VIX and the inversely correlated S&P 500 Index can enable traders to forecast upcoming market changes. Figure 7.2 illustrates what I call my Weathervane. As noted earlier, the VIX is a forward-looking indicator that can help to forecast market price turning points. If we monitor the slope of an 8-week EMA of the VIX as the leading indicator and then confirm it with an S&P 500 MACD line crossover, we can accurately pinpoint price trend reversals. These important market pivot points also correlate with market season changes. The two indexes can thus be used to create a tool for monitoring market timing.

FIGURE 7.2 Weathervane.

Upper pane: $INX and the VIX (Volatility Index), weekly, 8-week EMA for the VIX. Lower pane: $INX MACD (12, 26, 9).    The Weathervane combines an overlaid comparison of the S&P 500 Index with the Volatility Index. It functions to provide the following:   • Pattern recognition. Separation and approximation of indexes of the two inversely correlated indexes.   • Buy signals (B). Given when the slope of the VIX 8-week EMA is down, combined with a bullish MACD crossover for the S&P 500.   • Sell signals (S). Given when the slope of the VIX 8-week EMA is up, combined with a bearish MACD crossover for the S&P 500.   • Market seasons. Determined by the position of the MACD lines in reference to the centerline: winter—below and sloping down, spring—below and sloping up, summer—above and sloping ...

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