VOLATILITY INDEX
I have been saying repeatedly in this column to BUY FEAR AND SELL CONFIDENCE. So how does one BUY FEAR. For this we have a friend in the Volatility Index called India VIX.
VIX as it is generally known, is an indicator which runs contrarian to the Stock markets. It also tells us when markets have reached extreme levels of OVER BOUGHT or OVER SOLD LEVELS. Once these levels are reached one can expect a reversal.
As has been my experience, the majority of the crowd hardly ever gets it right. Smart traders use this index to bet against the crowd.
So, how does one use the VIX ? It is very simple. Just wait patiently and watch for the index to peak above 30, and at the first signs of reversal, BUY shares. As the VIX keeps falling the markets will begin to rise. It’s as simple as that.
There is an old saying " When the VIX is high, its time to BUY". This is true because at this stage, the fear in the markets are at its peak. And when the crowd sells, the prices fall. That is the time you do your BARGAIN BUYING. A recent example will clear the air.
http://chartink.com/stocks/indiavix.html
Just last week the markets fell 650 points, and the India VIX touched 36. If you had bought shares at this time, you would be laughing your way to the bank today. In the chart above you can see that on 31st July, the 5 day EMA cut the 25 and 50 day EMA from below. The VIX started rising and reached the highest at 36.
Other examples in the world markets can be corroborated with the CBOE VIX.
When 9/11 attacks took place, the CBOE VIX was 49.35
Asian currency crisis in Oct. 1997 VIX was 48.64
European crisis May 2010 VIX was 48.20
US debt rating down grade August 2011 VIX was 48 and the list goes on.
So my dear friends, make India VIX your best friend and make money of your life time.
Tony