VIX and VXN Indicators

VIX (S&P) and VXN (Nasdaq) Indicator - measures market psychology

Overview:
The VIX or Volatility index is ratio of put options to call options. It is a useful indicator because it indirectly measures market psychology. The VIX is like a contrarian indicator, when it's low, it means that more people are buying call options, and thus are bullish on the market. Contrarian theory tells us that the majority of people are wrong about the stock market, therefore when the masses are overly bullish, the market is usually topped out and about to tank, and vice versa.
It is the direction, not the level, that is the most important. The VIX is inversely correlated with the Market. For example, by using technical analysis, if you decide the VIX is going to fall in the short term, the market will usually rise, and vice versa. Normal pattern or technical analysis can be preformed on the VIX an attempt to decipher market direction.
Also, levels over 40 are considered oversold, and levels below 20 are considered overbought. The old saying applies, when the VIX is low it's time to go, when the VIX is high, it's time to buy. However, the VIX can remain in extreme levels for a long time. Therefore, it is best to deciper the direction of the VIX rather than the level.

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