Playing with Volatility ?

After reading an Article by Bill Luby about the VIX I decided to look into it deeper. The link to his article: "Take a Longer View on Volatility" Basically I wanted to see if the 10% difference between the 1month CBOE S&P500 volatility and the 3month COBE S&P 500 volatilty will produce a change in the direction of a trend.

The graph above has the green/red line representing the VIX while the blue line representing the VXV. I used 20 days data on an hourly chart. Notice on the closing of June 19, 09 the two lines % difference was significant. The one month volatility subsided that day versus the three month volatility. So what news could have reduce the one month volatility?

Not technically news but the market was set for a Quadruple Witching Day. Simply options were going to expire on that particular day and one would expect a lot of volatility on expiration dates, huh? This goes in line with Bill's theory that the VXV can not be affected as much on a daily event as the VIX. Clearly the volatility was still above thirty for the VXV and oddly enough the following trading day the VIX went beyond the thirty value. Just to add the following Monday the DOW dropped 200 points.

I added a Fibonacci line of retracement and for the following Monday, July 05, 09 the VIX seems posed to move up pass the 50% and 38.2% retracements. So what will this mean for the DOW? Well on Wednesday the VIX hit a bottom while the VXV hit 61.6% retracement. Then without warning the both indexes shot up. Each index gaining about 2 points, thats pretty signficant on a daily move. That day the DOW went up about 50 points. The following day the DOW dropped over 223 points, and the increase in volitilty indexes continued to race upward. My feelings are if the gap between the VIX and VXV are wider the more triple digits movement we will get from the DOW. Whether it will be up or down depends on a lot of factors, but reading through these charts I believe this coming week the market is pose for battle between the bulls and bears. (I know, I know a lot of people have been saying that, but I just got one more evidence as to this being true.) If the upside can not be sustained then we will continue with the downward trend for the past three weeks. Remember trend is your friend.