Introduction
As a trader, we’re always searching for methods to improve our trading, giving us additional tools in our war chest beyond what is typically available through standard methods. Some people are bottom bounce traders, some people are fully technical traders, some people trade based on fundamentals. We’ve all got our “thing”. Well, until recently, I hadn’t found my “thing.” I’ve struggled making consistent results and picking up on the right signals. As such, I’ve bounced from technique to technique trying to find my spot, my place, my niche. I’ve done well enough to get by and put a little extra change in the pocket, but I’ve certainly not reached professional trader status.
I will though.
Some of the charts in this will be shared from Trendspider (my preferred charting solution), while others will be screenshots from Tradingview. I use Trendspider for my daily charting needs but there are some tools I needed to draw out this theory that I did not have available to me on Trendspider. Tradingview was also helpful as I tend to change things daily on my Trendspider account.
The VIX Volatility Index
It was probably a year before I found out about the volatility index. If you’re unaware of it, read through this. You should have a basic understanding of the VIX before reading through the rest of this theory.
https://www.investopedia.com/terms/v/vix.asp
Familiarize yourself with VIX, study how it moves and how it fluctuates along with the major indices’ price movements. Add it to your watchlists keep an eye on it at all times.
Newton’s Third Law, and why does that matter here?
If you’re unfamiliar with Newton’s Third Law of motion, it states “that for every action there is an equal and opposite reaction.” I don’t believe this is limited only to physics. This can also impact economics. For every dollar you put here, you take a dollar from somewhere else. Economics on a macro scale is a balancing act. When a major event happens (war, disease, etc…), It kicks off a series of events (i.e. economic policy changes) that leads to large amounts of money moving around. It then becomes a major balancing act for years to keep the economy and the markets stable. Review the charts below with some details about what economic events happened during those time periods.
Mirrored VIX Theory
Source for the below chart: https://www.tradingview.com/x/Frmawxxd/
A few weeks back, I was reviewing the VIX daily charts. I noticed that since august 2021, it looked like we’ve been in a rising volatility trend. Seen below here:
Looking at the other side, I found that we were in an obvious declining volatility trend shown with the downtrending line below:
When zoomed out, they looked pretty close to the symmetrical in terms of the angle of ascent and descent…. This is what initially piqued my curiosity and led me to look back at historical VIX. I want to see if I could glean any clues from past recessions. What did those periods look like?
In viewing historical VIX back to 1990 (even though I read VIX didn’t officially start until 1993), I noticed that one could identify an initial event that kicked off the volatility period and then find a corresponding event with equally high volatility, which led me to the idea that every economic event has an eventual and equal undoing (refer back to newton’s 3rd law above). Inside of those periods, there were identifiable peaks and valleys that were seemingly equidistant from one central point. I will refer to that point in this theory as “Center VIX”.
Feel free to refer to the chart at the top of the Mirrored VIX section. It includes a White line in the middle. This is center VIX. I marked this in each of the charts earlier as well. Center VIX appears to be a transition period from declining volatility into a period of increasing volatility.
I marked lines in each of the charts to the left of center VIX and measured the negative distance from center VIX on each of the volatility period charts I included in this medium. To make this easier to read, I used different colors for each time period from center vix. In looking into the charts, we can see that from center vix each time period on the left has a corresponding high volatility either at or close to the marked lines.
I have included the distance from center vix. On the negative side, the marked distance is noted above the line. On the center VIX positive side, the marked distance from center is noted above the line.
One thing I noticed is that there appear to be 3 important phases from center vix, I have marked those in negative center vix side in orange, and on the positive vix side in pink.
The first phase from Center vix to the positive side, there is a slow incline from August 19th 2021 through June 9th 2022. Negative vix sees the gradual decline from August 18th 2020 through August 19th 2021.
The next phase is the what I call the ramp up, Which appears to start on both sides of the char with a period that drops below the trend line for more than a week. Since we don’t appear to be complete in the ramp up phase in the current cycle, I can only speculate where it goes from here. In this case, I am expecting increased volatility from here until 10/25/2022 which is equidistant from the blue line in negative vix territory of -299 trading days from center vix. I believe we can reasonably speculate that we will be seeing VIX in the 41–42 level around October 25th.
The Third phase from center vix is the volatility explosion. After the 2nd phase, we see a drop in volatility in negative vix territory that comes down all the way down to support before ramping up to explosion territory. In Negative VIX territory, this is -359 trading days from center vix. In this theory, I speculate that near +359 days from Center VIX, we can see a similar volatility explosion. How far does it go? To get an idea of that, let’s look at historicals.
After the Afghanistan war started in 01–02, we had a falling out which seems to have kicked off the beginning of the volatility period. both sides here peak around the same level (35–37)
When Operation Desert storm began, we saw volatility hit about the same 35–37 range.
As we have not reached that point yet in this cycle, we can only speculate from here where it may go. Historically, it hits around the same volatility level as the cycle began. If we follow the same as the limited VIX historical examples we have, then I believe we see around an 80–85 VIX during the end of January 2023.
Final phase?
Maybe…
in both of the previous cycles there was a final closing phase. I have not dug into it too far, but it appears to be the final leg. I am not speculating on where this goes but I have measured moves to see where it could go.
During the dotcom burst:
Financial Crisis of 2008:
Where does this go from there?
I’m not sure. I can only speculate, I’m still digging, but in summary so far, I Believe the VIX may be the most predictable asset in the entire market during an instability period. Monetary policy and changes made on the front end must be undone on the back end, and at least gives the appearance that the unraveling happens on a reverse timeframe with similar effects possibly predictable from the data available in the Cooldown period from the initial event.
