I have published this before, but this shows more examples of how you analyze the market for "Smart Money Buyers" that you can rely on. First you have to wait for a spike up in VIX of at least 5 points, then you wait for a pullback of 75% of that VIX spike. Plot the movement from the price low to the level the market was when the 75% retracement level was touched.
Who buys when VIX is HIGH? Smart money. People with a lot of money to manage who need to buy when there are a lot of sellers. Major, long term buyers buy when VIX is high because that's when prices are low. That's how the market works. Why? I can explain, but first please thank TradingView for this amazing software which has allowed me to find this great piece of market information from analyzing the data that you can get here so easily and graph and manipulate to your heart's content.
What I have also found in this data is that at the end of 2012 VIX was rising while stock prices were grinding higher, which implies SMART, LONG TERM buyers had a TON of stock to buy and wanted to buy it aggressively. I marked that extremely bullish setup with a purple box.
The other boxes are marked in bright green so you can see the movement from the lowest low of the correction to the point where VIX had settled back 75% from its run-up.
The way to utilize this information depends on your investing time frame. If you are a trader, I can see that there are some low risk entry points on pullbacks to the 75% price level, which is the top of the green box. Long term investors can rest assured that they are riding the trend when prices are above the bottom of the green box.
More "history" of the 75% VIX retracement SUPPORT LEVEL to come in subsequent charts.
Good work Tim. I might add... VXX and VXX options trading is also good to monitor for the really agressive money managers. Watching the call to put ratios are key, and the volumes of not just all of them, but the in the money rather expensive ones. Buying 100 options of cheap out of the money is more the speculative individual. Buying 1000 of in the money rather expensive options is the hedge fund big money. When I see a huge daily volume of calls versus puts of i.e. two strikes side of the strike price, the larger volume usually is the side to be on. Its not like vegas, where the house always wins and most people are wrong. Following the big money usually works well, if you can find it and identify it. That';s what you've done here with this chart. Good work. Thanks for posting.
claydoctor
⋅
Also, one more point... If you watch VIX options and VXX option trades during the day or day to day, and get familiar with the price of options at various strike points, the relative expense constant is also key. For example. If the market is going sideways, but a particular option call strike price is increasing, it indicates that investors are willing to pay more to protect their long positions either in the S&P index or one of the major components, which indicates they feel the market will fall or is falling. It may be from a news bulletin, etc. And watching that same strike price decrease during that day, and the market continues sideways, the news risk off factor fades, VIX prices fall, and we are back to a normal relative price of VIX to the markets. You don't have to watch the news, just watch the relative price of VIX option contracts to tell what is going on. This radar watch has served me well.
IvanLabrie
⋅
Thanks for sharing, seems like a smart way to track public fear.
timwest
⋅
You are very welcome @claydoctor - Tracking the big money is possible with the techniques we are outlining here. Big money flowing into put options relative to call options will drive the Skew higher, which we can graph here too (now). I didn't realize we had SKEW in our toolkit here at TradingView, but we do. If big money is front-running their own selling (very typical when I was working on an institutional trading desk) then it does show up in the price of options.
timwest
⋅
UPDATE
juanclos
⋅
Hi, may I ask about the indicator used to determine strong money, in extreme times it is thinkable but many sideways that do not seem to be really important are stressed as smart money accumulating; what makes you say that?
DRP37
⋅
Tim, Would you say this VIX analysis would hold for other indexes besides SPY?
timwest
⋅
Yes, VIX is the volatility of the S&P500 options, so it is best used for the S&P500. However, since the S&P500 is such a broad based index of 500 stocks, it is fairly representative of the entire US stock market.