I ran some tests to see whether the lower fear levels occurring on a day where the S&P 500 made a substantial low indicated more selling was likely to come. For my tests I used the VXO. The conditions I layed out were 1) The S&P 500 must close at a “x” day closing low. 2) The VXO must close lower than yesterday. 3) The VXO must close at least 10% above its 10-period moving average. The study seemed to indicate that extended VXO levels – even if they were less extended than the day before, had a positive impact on returns over the next week or two.
Below are the results when looking for a 20bar low in the SPX.
The fact that the VXO is stretched appears to be more significant than the fact that it pulled back.
Moving the bar out to a 100 bar low for the SPX gave these results.
In my post on Friday I discussed the high put/call ratios. For some other interesting perspective on these numbers, check out the links below:
Traderfeed - An interesting study and indicator to add to your p/c charts.
Daily Options Report - Some thoughtful musings on p/c related to volatility.
VIX and More - A long term view of the equity p/c ratio.