CBOE’s Volatility Index (VIX) is used by some traders as a confirming indicator: When VIX is trending down; the market should be trending up. A look at recent VIX behavior relative to SPX shows the spotty record of VIX as an indicator. Refer to the attached chart.
Lines #1 and #2 show that during November, 2010, VIX was trending up, a supposed indicator of impending doom. But SPX failed to cooperate and rallied over 150 points from early December to mid February.
Lines #3 and #4 show that a rising VIX from late January to late February, 2011, did precede a short-lived 75-point SPX decline that started on March 10 and ended shortly after the nuclear tragedy in Japan.
Lines #5 and #6 – declining VIX and rising SPX – now seem to indicate that the market is in a sustained uptrend (until things change).
My take on VIX as an indicator is this: Used in conjunction with traditional analysis, VIX is frequently helpful in confirming trends and providing warnings of impending changes in market direction. It is, however, an intermediate-term indicator and not particularly useful for short-term trades.