Significant internal and ancillary indicators can help a trader find strong odds and highly asymmetric times where the upside potential vastly outweighs the potential risk. One of those indicators we use, and teach, in our VTI/REED$TRADER Stock Market Timing Workshop, highlights possible short-term market lows. Today, let’s take a brief look at the Jeff Clark-VIX indicator.
In 1993 the Chicago Board Options Exchange (CBOE) started releasing data on the VIX (Volatility Index). Shortly after that, astute trader Jeff Clark noticed that this Volatility Index on the S&P tended to pop above or below Bollinger Bands and then back at key short-term turning points. I was a subscriber to one of Jeff Clark’s services at the time and I quickly began using the combination of VIX and Bollinger Bands that he was using. I adapted it to my methodologies and have been using it ever since.
The VIX tends to move in the opposite direction of stocks. When markets are dropping, volatility rises, and when markets rise steadily, volatility often falls. Let’s look at the signals I’ve adapted and used for decades to catch short-term bottoms in the S&P.
The 1,3 Strategy
Jeff Clark-VIX Indicator (middle), ROC (bottom), and S&P (top). Courtesy StockCharts.com
WARNING: Only use Jeff Clark-VIX for normal or minor corrections of short-term moves against the primary trend.
- Avoid utilizing this indicator in this way if you get a correction over 15% or so, or are expecting a potential intermediate-term or more significant correction. Context is important!
- Only use this indicator to go with the primary trend. You can use the mirror image to go short, but only in bear markets.
Looking at the chart above, there are two main components of the signal (1 and 3) and one additional component (2) if you want to fine-tune it to intra-day analysis.
- In mid-June of this year, the S&P went into a short-term correction against the main intermediate-term trend up.
- As the S&P declined, volatility started moving higher. At point 1, at the green circle in the chart, the $VIX moved above its upper Bollinger Band (default settings on stockcharts.com 20,2), showing that it was getting extended.
- Basic signal:
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- $VIX close closes above the Bollinger Band at 1
- $VIX closes back below the Bollinger Band at 3
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- One of the most straightforward strategies one can use when this happens is to buy the SPY and concurrently buy an at-the-money put with at least five weeks duration left.
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- The put limits the loss on the position. If you get near its expiration, and the SPY hasn’t moved sharply higher, you can exit the entire pair/position.
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- Using this simple strategy has been highly profitable since the 2020 major bottom (see the chart of signals below).
You’ll also notice that just as the $VIX is about to peak and turn down, the ROC indicator in the bottom panel usually pokes above 20. You can set this intra-day as an alert to tell you the market is setting up for bouncing off of support.
The simple 1,3 strategy has produced much stronger returns than the S&P and has been profitable virtually nine of the last ten trades since the 2020 major bottom.
If you attended our previous market timing seminar, you would have avoided the last two trades, including the loss, because of the context expecting an intermediate-term correction.
If you’re interested in learning about many more indicators to help you time the market and understand the market backdrop, you’ll want to attend our upcoming VTI/REED$TRADER Stock Market Timing Workshop.
If you’re interested in the context of intraday trading, you might even consider our upcoming Stock Market Timing Masterclass. In Masterclass (a post-course support class offered to those who attend the workshop), we teach you how to look intra-day at key support points as the Rate of Change gets overdone so you can cut your risk and use quick profits to fund your put. Combining this strategy with intraday setups dramatically increases the profitability of the strategy.
We have students who have tested this method back to the 2009 market bottom. The strategy has produced over five times the S&P return on under 1/3 of the S&P risk. This strategy is just one way of using market timing indicators to trade the indexes directly. You can also use this information to time purchases of a particular list of stocks and improve your slow reeds trading or any other trend-following method.
Green dotted verticle lines denote Jeff-Clark VIX signals since the 2020 Major bottom. Courtesy StockCharts.com