Excerpt from Real-Time Transcript for Tuesday. December 23, 2003. Interview with Bernie Schaeffer: [PDF]
| 12:00:35 | Teresa: I'm going to dig out my Connors on Advanced Trading Strategies and then we'll talk about VIX reversals in a bit. | ||
| 13:39:56 | Teresa: Here's some links to pages that are interesting. I found myself referred to in the first one. LOL. | ||
| 13:40:45 | Teresa: In this article, there is a link to the original article that Bernie Schaeffer wrote years ago, one that discusses the use of Bollinger Bands. | ||
| 13:41:49 | Teresa: Here's the relevant information from the article: Sentiment Indicator, VIX, With Bollinger Bands | ||
| 13:42:00 | Teresa: In the September 1997 issue of The Option Advisor we gave a short description of the Chicago Board Options Exchange Market Volatility Index (ticker symbol–VIX) in the “Option Strategy of the Month” section. Included in the discussion was an explanation of how the VIX is calculated and a statement regarding how the movement of this “index” can be used to help in short- term market timing. This month, we will prove our claims about this young “indicator” by using an old analysis technique, Bollinger Bands. As an oscillating indicator, the VIX generally helps us predict future market performance by gauging the level of fear in the market following a pullback. Although a complete discussion of how the VIX and OEX are related is beyond the scope of this discussion, our research has shown that a generally inverse relationship exists between these two indices. The Bollinger Bands we use are drawn two standard deviations above and below the VIX 21-day moving average. Because the VIX oscillates, a break above the u | ||
| 13:42:42 | Teresa: pper band indicates that the index has reached an extreme high and will shortly begin to move in a downward direction. This band break would therefore be a bullish sign, since the OEX and VIX are inversely related. Conversely, a VIX move below its lower band would have bearish implications. | ||
| 13:42:55 | Teresa: We studied these VIX band breaks for the period from 1/1/90 to 10/10/97 (even though the VIX has only been around since 1993, estimated back that data was provided by the CBOE). During those (nearly) eight years, there were 125 breaks of the upper band and 57 breaks of the lower band. After upper band breaks, the market experiences an immediate boost that lasts until about the seventh or eighth day. Average market performance subsequent to lower band breaks takes a turn for the worse after one day and drops off sharply for the next 4 days before recovering. In fact, the amount of average underperformance for bearish signals is slightly greater than the amount of outperformance for bullish signals. | ||
| 13:43:11 | Teresa: What is not immediately noticeable is the relative degree of strength shown by these signals. For example, after 5 trading days, the market is up 0.745% on average following bullish VIX signals and down 0.458% on average following bearish signals. This 1.20% gap is the largest we have seen from any dichotomous signals that we have ever studied. In other words, compared to other studies with a similar number of signals, the results of this study have yielded a more pronounced difference between bullish and bearish signals. | ||
| 13:43:26 | Teresa: The overall market environment is quite positive right now and certainly unlike the market prior to the 1987 crash. There have been no significant cover stories that hail the market as unstoppable, and the general consensus among market timers is much more restrained. In addition, put option selling on the OEX is not excessive like it was in 1987. This suggests potential buying strength remains, meaning that the likelihood of significant downside pressure after options expiration is limited. To sharpen the focus of this general market background, we can use the DJIA open interest put/call ratio and the VIX to better gauge our entry and exit points. This sentiment analysis combined with effective technical analysis can certainly add value to any portfolio. | ||
| 13:49:31 | Teresa: What I do is use the Bollinger Band setting suggested by Schaeffer, and then use a couple of Connors VIX Reversal setups too. | ||
| 13:53:01 | Teresa: The book I am referring to is by Laurence Connors: Connors on Advanced Trading Strategies. | ||
| 13:58:29 | Teresa: Apparently there is a newer book called Trading Connors VIX Reversals as well, available at M Gordon Publishing. | ||
| 13:59:03 | Teresa: Anyway, I personally never trade the "signals" per se. If use them as an indication, and use them in conjunction with the Schaeffer technique. | ||
| 13:59:25 | Teresa: I also think that VIX is not what people really think it is, i.e., it's assymmetrical. | ||
| 14:01:49 | Teresa: Let me get you a chart and show you what I mean. | ||
| 14:02:01 | Teresa: It's going to take a few minutes. | ||
| 14:09:28 | Teresa: Here's the monthly chart of VIX vs. the S&P 500  |
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| 14:14:31 | Teresa: The thing that sure sticks out at me is that fact that VIX was generally rising with the market and over time, "low" became higher and higher. | ||
| 14:16:17 | Teresa: Since the big crash, you can see that fear is not that big anymore. Lots of people see this as some sort of bad omen, but I have discussed this at length, that I think fear is assymetrical and that low values per se might not be indicative of complacency at all, but rather less perceived risk. | ||
| 14:16:58 | Teresa: For example on the way back up you can see that there was a new "average" leavel of fear if you look at the numbers pre-1996 and post-1996. | ||
| 14:18:51 | Teresa: As the market went higher and higher in terms of price, the $VIX grinded higher and higher too. | ||
| 14:19:27 | Teresa: I perceived that as a "fear of heights" phenomenon, similar to the feeling when you look down from a really high building. | ||
| 14:20:25 | Teresa: What hasn't changed seems to be at the end of a big washout, the absolute fear level seems to find big spike in the 50-55 area. | ||
| 14:21:42 | Teresa: Of course, we've now seen a big rally in the market over the last year, and VIX is at a 10-year low, which is interpreted as complacency. | ||
| 14:23:18 | Teresa: I think that this is a function of the fact that we've seen so many things that we've become jaded, so there is less fear. Also, the market has already crashed, so anything short of that is not really that "scary". Plus, I think if you have a slow move up, the "fear of falling" is not that acute, and all this adds up to low $VIX readings. | ||
| 14:23:49 | Teresa: The fact that the market is barely moving probably adds to the lack of fear. It's just not that volatile these days, if you know what I mean. | ||
| 14:24:58 | Teresa: That said, let's go to the Connors VIX reversal setups in his first book. There are three of them. | ||
| 14:29:20 | Teresa: The Connors VIX Reversal I is: | ||
| 14:29:28 | Teresa: For buys: | ||
| 14:29:41 | Teresa: 1. Today, the VIX must make a 15-day high. | ||
| 14:29:56 | Teresa: 2. Today, the close of the VIX must be below the open. | ||
| 14:30:33 | Teresa: 3. If Rules 1 and 2 are met, buy the S&Ps on the close of today. This will have to be done at the same time Rule 2 is met, and in the last few minutes of trading. | ||
| 14:30:42 | Teresa: 4. Hold the position at least one to three days. | ||
| 14:30:50 | Teresa: For sells: | ||
| 14:31:00 | Teresa: 1. Today the VIX must make a 15-day low. | ||
| 14:31:13 | Teresa: 2. Today the close of the VIX must be above the open. | ||
| 14:31:45 | Teresa: 3. If Rules 1 and 2 are met, sell the S&Ps on the close of today. This will have to be done at the same time Rule 2 is met and in the last few minutes of trading. | ||
| 14:31:55 | Teresa: 4. Hold the position at least one to three days. | ||
| 14:32:23 | Teresa: The goal here is to identify short-term market tops and bottoms. | ||
| 14:32:51 | Teresa: The Connors VIX Reversal II is: | ||
| 14:33:00 | Teresa: For buys: | ||
| 14:33:11 | Teresa: 1. Take a five-period RSI of the closing VIX. | ||
| 14:33:37 | Teresa: 2a. When the five-period RSI gets to 70 or above, it signifies the VIX is overbought and the market is oversold. | ||
| 14:34:58 | Teresa: 3. When a daily RSI reading above 70 is followed by a downtick in RSI, buy the market that day on the close. | ||
| 14:35:19 | Teresa: 4. Exit five to eight trading days later or use some type of trailing stop exit. | ||
| 14:35:22 | Teresa: For sells: | ||
| 14:35:32 | Teresa: 1. Take a five-period RSI of the closing VIX. | ||
| 14:36:09 | Teresa: 2b. When the five-period RSI of the VIX gets to 30 or below, it signifies that the VIX is oversold and the maket is overbought. | ||
| 14:36:28 | Teresa: 3. When an RSI reading below 30 is followed by an uptick in RSI, sell the market that day on the close. | ||
| 14:38:27 | Teresa: 4. Exit five to eight trading days later or use some type of trailing stop exit. | ||
| 14:38:43 | Teresa: Connors VIX Reversal III: | ||
| 14:38:46 | Teresa: For Buys: | ||
| 14:38:59 | Teresa: 1. Today, the low of the VIX must be above it's 10-day moving average. | ||
| 14:39:16 | Teresa: 2. Today, the VIX must close at least 10 percent aboe it's 10-day moving average. | ||
| 14:39:31 | Teresa: 3. If Rules 1 and 2 are met, buy the market at the close. | ||
| 14:39:57 | Teresa: 4. Exit on the close the day the VIX trades intraday below yesterday's 10-day moving average (reversion to the mean). | ||
| 14:40:00 | Teresa: For Sells: | ||
| 14:40:14 | Teresa: 1. Today, the high of the VIX must be below its 10-day moving average. | ||
| 14:40:30 | Teresa: 2. Today, the VIX must close at least 10 percent below it's 10-day moving average. | ||
| 14:40:38 | Teresa: 3. If Rules 1 and 2 are met, sell on the close. | ||
| 14:41:09 | Teresa: 4. Exit on the close the day the VIX traders intraday above yesterday's 10-day moving average (reversion to the mean). | ||
| 14:42:11 | Teresa: You can see from the newsletters that I have written that I insist that the Bollinger Band is touched, plus they have to be full Connors VIX Reversal I and II in order for me to place significance on the signal. | ||
| 14:43:35 | ttrmig: T, I just want to let you know that I am reading your explanations, that you are having an audience. Thanks. | ||
| 14:47:41 | mlorvo: this is so great, I've already got too many of the "essential trading books" | ||
| 14:54:21 | Teresa: yeah, all the "essentials"...all good for one page each. | ||
| 14:54:32 | Teresa: So I saved you all $150 right here. | ||
| 14:54:51 | Teresa: I'll be back in about 10 minutes. A girl has come to take some of my bounty of finches away. | ||
| 15:17:15 | Teresa: So basically I use a combination of the best signals. | ||
| 15:17:33 | Teresa: I insist that the Bollinger Band is touched, plus a bar reversal along with the RSI hook. | ||
| 15:18:24 | Teresa: I am not sure how I can go about proving the asymmetry of the fear though, so for now, you'll have to take the theory at face value. | ||
| 15:18:37 | Teresa: We've got a few engineering problems like this that I have to tackle in the coming months. | ||
| 15:19:20 | Teresa: And you'll note that NONE of these reversals are use on any other timeframe other than DAILY. My use of them on the weekly is not outlined in Connors' book. | ||
| 15:21:11 | Teresa: I don't use the CVR III, mainly because I'm not a big fan of reverting to the mean. | ||
| 15:21:26 | Teresa: Michael Friesen and I don't believe this theory whatsoever. | ||
| 15:22:04 | Teresa: If you think about it, there's no reason why the market has to return to the mean, however it is measured. | ||
| 15:24:34 | Teresa: In fact, I would never use a moving average whatsoever if it weren't for the fact that other people's popular "setups" are based on moves to a certain moving average. | ||
| 15:25:49 | Teresa: It's never made any sense to me what using a moving average is even useful. |
04.02.19 13:11 #