May 13, 2021Trade Ideas

One of the best ways to tell when volatility has gotten a bit out of hand is with the VIX, or the Volatility Index. Or, what’s better known as the fear gauge.

In fact, when markets pull back as viciously as they have, watch for peaks on the VIX, using RSI, Williams’ %R, and Bollinger Bands (2,20) on a two-year chart. When these three indicators align, we’ll often see a reversal in the VIX and in the major indices.

Let’s use the Dow Jones, for example.

Using history as our guide, look at what happens when RSI moves to or above its 70-line, coupled with a move to or above the Bollinger Bands, coupled with Williams’ %R at or above its 20-line. About 90% of the time, we’ve seen a reversal.

We just saw it again today. The VIX topped out. RSI topped out. Bollinger Bands topped out. Williams’ %R topped out, and the Dow found support and moved higher. With hopes the bottom is now in, and we’ll see mean reversion in the VIX, we can bet against volatility. We can do that with the VXX May 28, 2021 43.50 puts, which last traded at $3.85.

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