http://www.tradingmarkets.com/.site/stocks/education/shortterm/01112...

New ETF Book by Larry Connors - Click here to read more

Home PowerRatings Free Trials Products Stocks ETFs Options Forex Eminis/Futures Quotes & Charts

Saxo Bank – forex trading online

Market Timing Using The VIX

By Larry Connors | TradingMarkets.com

The following was transcribed and Are you looking to increase you ETF knowledge?

Stocks edited from TraderTalk, a free, live,

interactive workshop conducted for
Trading Ideas TradingMarkets members by Larry
Short Term Connors.
Long Term
All Trading Ideas What Is The VIX?

In my opinion, the VIX is the best

Trading Lessons market-timing indicator available for
Strategies
short-term traders today. The VIX is,
Courses
simply, a measurement of the implied
Interviews
Glossary volatility of the at-the-money OEX Index
All Trading Lessons Options. High VIX readings usually
occur after markets experience sharp
Daily Stock Setups sell-offs, when fear is rampant and
Connors Daily Battle Plan sharp reversals to the upside tend to
Haggerty Professional occur. Low VIX readings (as we are
Kaltbaum Intra-day Set-ups seeing now) usually occur when the
Stock PowerRatings market rises. This is a signal that there
ETF PowerRatings is complacency in the market and a
TM Indicators sell-off is near.

Trading News Why Does The VIX Work?

Markets Updates
Technical Alerts
These four rules will help you understand why VIX signals work:
Breaking News
1. All volatility is mean-reverting. This simply means that periods of low volatility will be
followed by periods of high volatility, and vice versa. The academic world proved this
PowerRatings nearly 50 years ago, and it's one of the few truisms of market behavior. The reason this
Stock is important is that when the VIX has a high reading and begins to revert to its mean, it's
ETF
also accompanied by a market that begins to rally. Same thing for low VIX readings --
Charts
when it begins reverting to its mean, many times it's accompanied by market sell-offs.
Keep that in mind whenever you're looking at a VIX chart in the future.
Indicators
Stocks 2. Volatility is auto-correlated. That means if the VIX rises today, it has a better-
Market Bias than-even chance of rising tomorrow. This is most significant at market extremes and
right before reversals.
Quotes
Markets 3. This is the one that gets most traders on Wall Street messed up (and if you only learn
Stocks one thing from this session, this is the most important): The VIX is dynamic, not static.
Charts Simply saying that you buy the market when the VIX goes above 30, and sell the market
Historical Data when it trades around 20, is sheer B.S. The Press over the past couple of years has
Forex done a wonderful job of engraining this into traders' heads, but nothing could be further
Options from the truth. Blindly entering the market because the VIX reaches some
pre-determined level will eventually get you killed.

4. As mentioned before, the VIX measures fear. High VIX means that fear is high, low
Markets Worldwide VIX readings mean that fear is low. History has proven (and the CVR signals have
Day Trading statistically proven) that approximately two out of three times, when these market
Stock Trading expectations occur, a top or bottom is in place and we're going to look to fade these
Stock Picking expectations as we know we will be right approximately 65% of the time.
Swing Trading
Forex Trading CVR Signals
Futures Trading
Emini Trading I will now teach you two of my 10 CVR strategies. Both of these strategies can be found nightly on
Options Trading our Market Bias page. Also, all the strategies can be found in my book Trading Connors' VIX
Online Trading
Reversals and in my nightly service. (Why do I feel like Landry right now, shamelessly plugging my
Stock Market Analysis
Stock Rating stuff?)
View More Topics >>
The 10 CVR signals as a whole over the past nine years have correctly predicted two- to three-day
View Trading Glossary >>
market direction for the S&Ps approximately 65% of the time. The CVR 3 and the CVR 7 have
correctly predicted direction nearly 70%. First, let's look at the CVR 1 signal, which is the most basic
of signals, and then we'll look at the CVR 3, which is one of my favorites.

CVR 1 Signal

The rules for the CVR 1 are simple: For market buys, we are looking for the VIX to make a 5-day high
and close under its open. For sells, we are looking for the VIX to make a 5-day low and close above
its open.

Let's talk conceptually about what is going on here. First, a 5-day high or low for the VIX tells us that
the market on a short-term basis may be reaching some extreme. By waiting for it (for buy signals) to
make a 5-day high and then at the same time closing below its open (remember rule #2: Volatility is

1 of 5 11/12/2009 13:42
 http://www.tradingmarkets.com/.site/stocks/education/shortterm/01112...

auto-correlated), we are finding a market that may be experiencing a sentiment extreme and has a
higher-than-average probability of reversing for the next two to three days.

Take a look at some of the CVR 1 buy signals that occurred during the month of December and
helped us open up this year. As you can see, it did a good job of identifying swing lows throughout the
month.

The CVR 1 correctly predicts market direction approximately 59% of the time (one of the lowest of all
the CVR signals), but more importantly, I'm showing it to you for two reasons: one, for educational
purposes to get you to better understand conceptually what is happening, and two, because the CVR
1 signal, when it's combined with the CVR 3 signal (and many other signals) tends to increase the
percentage of the time that the signal is correct.

CVR 3 Signal

Now, let's move on to the CVR 3 signal and then we'll talk about entry and exit. My CVR 3 signal was
co-created with Dave Landry. What we found is that when the VIX moved 10% away from its 10-day
moving average, it identified a market that had been "stretched too far" and was likely to reverse. In
fact, over the last nine years, it has correctly predicted a two- to three-day reversal better than 68%
of the time.

The rules for the CVR 3 are as follows:

For Buys:

1. Today, the low of the VIX must be above its 10-day moving average.
2. Today, the VIX must close at least 10% above its 10-day moving average.
3. If rules 1 and 2 are met, buy the market on the close.
4. Exit (on the close) the day the VIX trades (intraday) below yesterday's 10-day moving average
(reversion to the man). Or exit within two to four days.

For Sells:

1. Today, the high of the VIX must be below its 10-day moving average.
2. Today, the VIX must close at least 10% below its 10-day moving average.
3. If rules 1 and 2 are met, sell on the close.
4. Exit (on the close) the day the VIX trades (intraday) above yesterday's 10-day moving average
(reversion to the mean). Or exit within two to four days.

2 of 5 11/12/2009 13:42
 http://www.tradingmarkets.com/.site/stocks/education/shortterm/01112...

PREMIER SPONSORED LINKS

Get all the support, resources and education for

trading Forex you'll need with the best bonuses
on the web by UFX Bank
Practice No Risk Trading at optionsXpress
North American Derivatives Exchange - Indices,
Forex, Commods
Reserve Your Copy Of The 2010 Commodity
Trading Guide Now
Get stock trades for only $4.50 each at Zecco
Trading

Download a free Options Basics Podcast.

Become an Introducing Broker at UFX Bank and
get the best deal on the planet, we will provide
you with full control, online, at all times!
Saxo Bank – forex trading online

Again, let's look at this conceptually. For the VIX to move 10% away from its moving average, the
market must have gone through some extreme one-way move. As we all know, the short-term moves
are nearly always unsustainable, and the best reversals come from them. We have found that the best
way to measure these extremes is with the CVR 3. On average, a CVR 3 signal occurs about once
every two and a half weeks, and we look to exit within a two- to four-day period of time.

Multiple Signals

Before talking about which markets to trade and entry and exit, I want to cover one more thing. The
CVR signals perform even better when you have multiple signals all pointed in the same direction. If
you take the signals from our Market Bias page, you'll want to see at least two CVR signals pointing in
the same direction. If you take the signals from my trading service, the ideal time is to wait for three
or more signals pointing in the same direction.

Many traders have their own market-timing methods, some which are quite good. CVR signals
combined with other internal signals will give further confirmation that those signals have an edge, and
increases the odds that your trade will be successful.

Money Management

One caveat: No matter how sure you are that the market is going to move in one direction, you need
to use protective stops and proper position size to manage the position. Even if you have a
methodology that's right 70% of the time, it's more important to remember that it's wrong 30% of the
time. The gains take care of themselves, it's how you manage that 30% wrong that will ultimately
decide how successful you are with your trading.

Vehicles And Entries

Now let's talk about which markets to trade and how to enter positions. The majority of my testing
(and real-world results) with the CVR signals have been with the S&P futures. This means that the
best way to replicate the results is to trade S&P futures (E-minis) or SPDRs. For the S&P futures, had
you traded one contract for every CVR signal since 1993, you would have earned approximately $1.8
million since this past summer. THERE IS NO GUARANTEE THIS WILL HAPPEN AGAIN. But this
should give you an idea of the cumulative effects of the CVR signals from 1993 up until recently.

With the SPDRs, you'll essentially be looking at the same results (percentage-wise).

Alternative Markets

For those of you who don't want to trade SPDRs or trade S&P futures, you should look at the Market
Bias page and the CVR signals to guide you as to what the likely market direction will be for the next
couple of days for the market. One of the things we have continuously preached on the site from Day
1 (in spite of the fact that it wasn't in vogue in 1999) was that we need to trade both sides of the
market to fully take advantage of them. Too many methodologies out there are "bull-market-only"
methodologies (or "bear-market-only") and all these guys got killed when the market turned on them.
If you're not trading both sides of the market, you should strongly consider doing so. Dave Landry
(there's that name again) wrote an excellent article on how to short stocks. Also, one of the
advantages of trading SPDRs is that they do not require an up-tick so you can short them
immediately, without worrying about violating the up-tick rule.

CVR Signals And Options

Probably the biggest edge with the VIX signals occurs in the options market, and I'll be the first to say
after trading the CVR signals for nearly six years, I haven't come anywhere close to taking advantage

3 of 5 11/12/2009 13:42
 http://www.tradingmarkets.com/.site/stocks/education/shortterm/01112...

of this edge.
TRADEWith that said, again let's talk about what's going on with the CVR signals, conceptually.
CENTER
For example, when a CVR buy signal occurs, and it is correct, it is correctly predictingRiskpriceFree
direction
Trading
and volatility direction at the same time. It really doesn't get much better than this for Spread
option traders.
Bet risk free for a day
There are multiple strategies to take advantage of such signals, ranging from selling naked puts (not IQ© from CMC
with Trading
advised, but certainly gives you the biggest edge) to trading verticals.
Markets
www.cmcmarkets.co.uk
Let's take this one step further: By selling premium on a CVR buy signal, you will haveDay priceTrading
explodingPenny Stocks
on the underlying (which means your short premium is imploding in your favor), and you have
Free volatility
OTCBB Stock Day Trade
imploding which is causing further good erosion on your short position. Plus, because these signals
Alert 600%+ Picks w/ Proven
are two to four days in nature, you also have theta (time) working in your favor. Again, it doesn't get
Track Record!
much better than this. PennyStockPickAlert.com/DayTrading
Free Options Tutorial
Let's go to a CVR sell signal. The correct strategy here is to be long put premium. The reason is that
Insider Option Trading System
when the signal is correct, price will move in your favor, increasing the value of your put, plus volatility
Download Your Free Expert
is also moving in your favor, increasing the value of your put.
Guide
www.TheTrendRider.com
As with all these strategies, you want to be in the market approximately two to four days, and you'll
want to make sure you use the correct stops to protect yourself when the signals are wrong. As far
as the perfect strategy to trade with this, that is 100% up to you, you're the only one who knows
what's best, based upon your trading style and risk tolerance.

Q&A

Here are some of TradingMarkets members' most frequently asked questions on the use of the VIX
and CVR signals:

Q: Do the VIX rules apply to the VXN and QQQ?

A: I have never really done extensive testing on the VXN. My initial testing (and my instincts) say that
the rules work the same, and there should be some sort of edge there. I would prefer testing this for
at least a five-year period of time before committing to this any further, but there should be an edge
here.

Q: What percentage of the time do multiple signals occur?

A: Multiple signals occur more often than you think. On average, when our Market Bias page has one
signal pointing in one direction, about half the time it will have another one pointing in the same
direction. And to reiterate what I said earlier, the multiple signals do increase the chances of success
with the trade.

Q: What about the recent low VIX and VXN levels?

A: As some of you may know from reading my weekly column or being a subscriber to my service, the
VIX has now spent a good part of the past two months under its 20-day moving average. The same
goes for the VXN. This by itself is not a signal that the market is going to sell-off immediately, but it
does give you a good heads-up that there is a great deal of complacency in this market.

Another example of this complacency was Monday night's action in the VIX. Even though the S&Ps
lost nearly 10 points for the day, the VIX barely budged, and in fact, closed near a four-month low.
Both VIX actions combined were telling you loud and clear that the complacency out there is at an
extreme, and certainly today's rapid, sharp sell-off occurs over and over again when these extremes
get reached. This is not a 2002 event or a recent market event; this type of behavior has been
exhibited by the marketplace for decades, and will continue to occur for decades to come.

Q: What about conflicting signals, meaning one CVR signal is pointing up and one CVR signal is
pointing down?

A: The answer is simple: PASS THE TRADE. There is no edge here.

Q: When are the signals on the site updated?

A: For those of you who are TradersWire Interactive subscribers, Greg Che comes on the Wire a few
minutes before the close and gives you the signals that look like they will likely trigger at the close. On
the TradingMarkets site and on my subscription service, the signals are updated nightly at
approximately 7:30 p.m. EST.

Q: What if the CVR signals conflict with the other Market Bias indicators?

A: If one CVR signal conflicts with another CVR signal, you'll want to pass on the signal. Again, there
is no edge. If a CVR signal conflicts with a TRIN thrust signal, or the momentum index indicator, the
CVR signals override those signals, and the CVR signals should be taken.

Q: What about specific entry triggers and stops?

A: There are two ways to do this:

1. You can anticipate the CVR signals occurring and enter the market intraday. This would be
especially true by placing stops at some level away from the market which will only get
triggered if the market strongly reverses intraday. This will many times give you a head start to
the signals (but is far riskier than a mechanical market on close entry when you know the
signals will be there for sure).
2. Simply to wait for the signal to occur, and then enter either on the futures at the close, or for
stocks, on the market opening the next day.

Another aspect to consider is the exit strategy. In my book Trading Connors VIX Reversals, we show
two- and three-day mechanical exits, and the results speak for themselves. For many traders, this
works fine; for me it does not. I'm much too hands-on. I need to be moving my stops and adjusting my
positions appropriately when I can. Again, this is a personal choice. The most important thing is to use
the CVR signals to gain an edge, and then take advantage of that edge.

>> See more articles by Larry Connors

Related Articles

4 of 5 11/12/2009 13:42
 http://www.tradingmarkets.com/.site/stocks/education/shortterm/01112...

The TradingMarkets Directory

Stocks Forex How to Trade PowerRatings Premium Subscription Services

Quotes How to Trade Stocks Stock PowerRatings Stock PowerRatings Free Trial
Charts Forex Momentum Index Options ETF PowerRatings ETF PowerRatings Free Trial
How to Trade Pivots Forex PowerRatings Charts TradingMarkets Subscription Free Trial
Commentary and Analysis E-mini/Futures PowerRatings Strategies Daily Battle Plan Free Trial
PowerRatings E-mini/Futures Glossary Search PowerRatings Gary Kaltbaum - Intraday Breaking Alerts Free Trial
Training Classes Quotes Kevin Haggerty Professional Trading Service Free Trial
Tools Tools Blogs
Charts
Stock Scanner How to Trade Stock PowerRatings The Money Blogs
Daily Market Bias Daily Market Bias ETF PowerRatings David Penn's Market Moods
Stock Screener Larry Connors on Short Term Trading
Options
Quotes & Charts
Quotes Stock Indicators
Charts Market bias Indicators
How to Trade
Commentary and Analysis

RELATED SITES

Please call 1-213-955-5858 ext. 1

......

About TradingMarkets | Contact | Advertise | Careers | Link to Us | Site Map | Help | Terms & Conditions | Privacy Policy | Return Policy | Testimonials | Feedback

Disclaimer:

The Connors Group, Inc. ("Company") is not an investment advisory service, nor a registered investment advisor or broker-dealer and does not purport to tell or suggest which securities
or currencies customers should buy or sell for themselves. The analysts and employees or affiliates of Company may hold positions in the stocks, currencies or industries discussed here.
You understand and acknowledge that there is a very high degree of risk involved in trading securities and/or currencies. The Company, the authors, the publisher, and all affiliates of
Company assume no responsibility or liability for your trading and investment results. Factual statements on the Company's website, or in its publications, are made as of the date stated
and are subject to change without notice.

It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results of any individual trader
or trading system published by Company are not indicative of future returns by that trader or system, and are not indicative of future returns which be realized by you. In addition, the
indicators, strategies, columns, articles and all other features of Company's products (collectively, the "Information") are provided for informational and educational purposes only and
should not be construed as investment advice. Examples presented on Company's website are for educational purposes only. Such set-ups are not solicitations of any order to buy or sell.
Accordingly, you should not rely solely on the Information in making any investment. Rather, you should use the Information only as a starting point for doing additional independent
research in order to allow you to form your own opinion regarding investments. You should always check with your licensed financial advisor and tax advisor to determine the suitability of
any investment.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS
DO NOT REPRESENT ACTUAL TRADING AND MAY NOT BE IMPACTED BY BROKERAGE AND OTHER SLIPPAGE FEES. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY
BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY.
SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION
IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.

The Connors Group, Inc.

10 Exchange Place, Suite 1800
Jersey City, NJ 07302

© Copyright 2009 The Connors Group, Inc.

All analyst commentary provided on TradingMarkets.com is provided for educational purposes only. The analysts and employees or affiliates of TradingMarkets.com may hold positions in the stocks or industries discussed here.
This information is NOT a recommendation or solicitation to buy or sell any securities. Your use of this and all information contained on TradingMarkets.com is governed by the Terms and Conditions of Use. Please click the link to
view those terms. Follow this link to read our Editorial Policy.

© 2009 The Connors Group, Inc.

5 of 5 11/12/2009 13:42