Vix, in particular, has some powerful predictive properties for equities. I find that the 10 day and 20 day Bollinger Bands (BB) help frame these properties.
Consider the 20 day BB and how vix oscillates between the bands. When Vix is in the lower half of the band, the trend in equities is up, and vice versa for the upper band. When Vix spikes outside the 20 day BB, that usually means an intermediate term top or bottom in the markets (last October the tops were very short term). These events are consistently followed by tests of the center of the BB, and usually lead to tests of the opposive BB.
However, many times Vix's behaviour is constrained by the 10 day BB, instead of the 20 day. So it helps to watch both.
Below is a chart of Vix, with both 10 day and 20 day BB. I also have the ratio of VIX/VXV in the same chart (VXV is the 3 month Vix). The second panel has $XJY (Japanese Yen) and GLD, while the third panel has TLT (20+ year Treasuries) and $SPX.
Vix jumped today, with both XJY and TLT finding support from their sell off last week and both starting to move up. These all correlated with the sell-off in equities. But if these trends continue, expect further weakness in stocks.
As noted on the chart, Vix did find resistance at its upper 10 day BB. Above this is the center of the 20 day BB. But if Vix makes it above these two, it probably means an extended downtrend in equities is in order.
And finally, we have the ratio of Vix/VXV. This ratio was trading at a discount since Christmas, it has since gone flat. This is normally bearish for equities as it implies investors are becoming more bullish on Vix.
However, the longer-dated Vix futures are still trading at a premium to the index, so perhaps the Vix/VIX ratio is not as bearish of an indicator.
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