Hurst Cycles Trading Software - Accurately Forecast Nifty and Stock Cycles

Monday, May 12, 2008

India VIX and how to read it....Plus some charts

Quoting NSE:
Volatility Index is a measure of market’s expectation of volatility over the near term. Volatility is often described as the “rate and magnitude of changes in prices” and in finance often referred to as risk. Volatility Index is a measure, of the amount by which an underlying Index is expected to fluctuate, in the near term, (calculated as annualised volatility, denoted in percentage e.g. 20%) based on the order book of the underlying index options."

India VIX is a volatility index based on the Nifty 50 Index Option prices. From the best bid-ask prices of Nifty 50 Options contracts, a volatility figure (%) is calculated which indicates the expected market volatility over the next 30 calendar days.

Now the very important thing to note here is that the VIX is a contrarian indicator. Higher readings show the fear factor while lower values indicate complacency esp among the public. There is really no upper or lower limit so this is often used as a contrarian sentiment indicator.

Why is this indicator considered contrarian?...Simply because of the fact that retail influences the value the most....After all Fear and Greed are what drives the stock market.

A picture is worth a 1000 words...See chart below for the US market VIX and how it marks important tops and bottoms. For us, we need obviously need more data to reach more accurate conclusions of what is HIGH and what is LOW for the VIX.

Now look at a similar chart of our market...Now I apologize for the quality over here...I did not have much to work with and this mostly a makeshift chart I created after a lot of effort....VIX is below and NIFTY is on top....You can see how high values on VIX mark the bottoms on NIFTY. To me it looks like 20s is a complacent value for the VIX and anything from mid 30s to upper 40s indicate fear and above 50 indicates panic....Btw, VIX was in 30s yesterday showing some fear...Unfortunately I do not have all the data below but I think it shows you how this works....Watch the VIX....It is an important weapon to add to our arsenal.


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