Breaking News: VIX Overbought!

• Posted by Adam Warner
• on October 27th, 2009

Well, by the narrow definition of it’s relationship to it’s 10 day SMA, we’re about 12% above it now, and any close over 10% above is considered a sign of an overbought VIX. And if the VIX is overbought, then perhaps that means the market is oversold.

To reiterate though, this is an indicator that needs context. In an intermediate bull trend, overbought VIX does tend to provide a good indicator of when a counter trend move has run it’s course. If in fact we’re still in an intermediate term bull move, then I would expect the selling to abate near here.That’s been the case for the past few month’s.

Basically this is a dangerous indicator to use blindly for straight market calls (hit it up for 2008 and note the carnage). But of course, that overbought VIX was in the same direction as the broader trend, a crucial distinction. If in fact the rally has run it’s course, we’ll do the opposite and start looking for oversold VIXes as our clues.

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