In our earlier post we had explained how India VIX can portend potentially sharp moves in Nifty in the near future.
To take the concept further, we looked back at the behavior of the Nifty versus India Vix (spot) to showcase how this can be an important tool in the arsenal of a positional or short term trader.
The chart below shows the Nifty’s movement from 2015 as well as the VIX index’s whipsaws since then (the chart is inverted so both moving up together is a good sign or if there is a divergence then there could be trouble ahead!)
- The blue trend lines on both indices show the areas where both indices gave what is called a negative divergence – meaning one index was moving in the opposite direction as the other one- for instance, if one sees the very beginning of the chart, Nifty was making new highs while Vix was making lower highs – and soon thereafter, the Nifty came down with a thud! Similarly, at the extreme right, the Nifty was making new highs even as the VIX was again making lower highs – and pointed to a correction which came soon after.
- There are several smaller divergences all through the chart which indicated such moves.
- All spikes above 20 , with quick recovery led to the Nifty rising decently over the next few weeks so this could be a great reversal indicator as well.
- The correlation is not absolutely perfect of course but it seems to be working most of the time.
- Currently, as of May 10, the VIX is poised in what we would call a neutral to mildly bullish zone (higher lows) and therefore doesn’t present much of a challenge – remember it has already fallen almost 26% in this expiry so that has allowed the Nifty to stage a recover so far.
Keep watching this space as we understand more about this fear indicator and share experiences with you!