Here's a simple idea for you to research. If you find it useful, "cheers". If not, just disregard it.

Pull up a P&F chart for VXO. Note the bearish resistance line. Note further the last 3 times an X reaches or exceeds the line. That would be March 6th, April 1st and April 28th.

Now pull up a chart for almost any S&P stock. Plug in those dates on the chart and ask yourself whether those would have been good days to buy the stock.

Aside from the obvious point, it is time to be very patient about when you open new positions and add to existing ones. When you do, it might be wise to take a peek at VXO to see where it is in relation to its BRL.

This isn't foolproof and it's just another tool to use........but if and when VXO hits the 36-37 area....

Both VIX and VXO are measures of option volatility on the S&P 500 (VIX) and the S&P 100 (VXO).

This is VIX and how it is calculated:

The CBOE SPX Volatility Index is calculated and disseminated in real-time by the CBOE. It is a weighted blend of prices for a range of options on the S&P 500 index. The formula uses a kernel-smoothed estimator that takes as inputs the current market prices for all out-of-the-money calls and puts for the front month and second month expirations. The goal is to estimate the implied volatility of a synthetic, at-the-money option on the S&P 500 index, with 30 days to expiration.

This is VXO:

The CBOE OEX Volatility Index reflects a market consensus estimate of future volatility, based on "at the money" quotes of OEX Index Options.

This is OEX and its options:

The Standard & Poor's 100 Index (OEX) is a capitalization-weighted index of 100 blue chip, large cap stocks from the U.S equities marketplace from diverse industry sector groups. It is a broad market index; together these 100 stocks represent over 50% of the market capitalization of the S&P 500® Index. The impact of a price change in any component stock on the level of the overall index is proportional to the issue’s total market value. Options on the S&P 100 are used primarily by hedgers and speculators in conjunction with bullish or bearish opinions on large-cap U.S. stocks.

For me, the actual formulas that comprise how the values are arrived at are meaningless. I simply don't do math....well, I can do some. But I really just want to see the relative relationships on a chart as the values change.

This is a website that I don't frequent, but it looks like it may have in depth information on interpreting VIX and VXO:

http://vixandmore.blogspot.com/2008/08/overview-of-us-volatility-indices.html

I think they charge a fee if you want to hang out there. Hope this helps.

.....oh, I chose VXO as my "indicator" because of how its chart looks in hindsight in relation to price action in the S&P for this short term rally. There will likely come a time when this will no longer work; and it may be that VIX will have better correlation to market tops and bottoms. It just seemed to me that VXO is a better "indicator" for the moment.

ST,

Thanks for the info about the VIX and VXO. I've been just trying to soak everything in like a sponge for the last couple of years, but I still have a long way too go! I watch the VIX, but have never really followed the VXO. Just another symbol to add to my daily list...

Thanks!

SM

I use http://dorseywright.com/

A subscription is $35 a month and it's one of the best investments in trading education I've ever made. The site has encyclopedic information besides charting services, both foreign and domestic; and once you get familiar with comparing stocks on a relative strength basis, you'll find it invaluable. Ask F5, he's the P&F expert.

To answer your question, to me, the real meaning of volatility (in the stock market anyway) is "fear". In fact, you've probably heard of the VIX described as the "fear index". The theory is (and it's pretty solid) that as the market falls, fear rises. As fear rises, VIX and VXO rise. As investors become complacent or ambivalent to fear, volatility falls. Generally, that's how it works. Many contrarians use VIX and VXO as market indicators.

What hasn't been discussed much is the impact of "greed" (or a feeding frenzy at market tops) on VXO and VIX. I haven't studied it, but I imagine that VIX and VXO are affected similarly. It's just that when a "feeding frenzy" happens, it is usually at the end of an extended period of complacency (low volatility), so it doesn't register on the chart quite like "fear" does. Look at historic charts of the S&P and compare the extremes in price to the corresponding chart readings for VIX (as VIX has been around longer).

ST, Do you see anything in the VXO to indicate a reversal is here? Your 36-37 range looks to have moved down to 33-34. Would the O's need to move to 26 before you see a reversal pattern setting up?

I've tried a couple of sites to do compare, most don't do VIX or VXO. What site do you use?

Another way to think about volatility is to think about how it stretches out the probability distribution of returns. Sure there is the probability of greater upside, but there is also the probability of greater downside. The expected return would be a weighted average of all the returns and it is likely this return declines when VIX rises because of a lack of symetry and downside returns likely carry higher weights during that period.

http://www.nytimes.com/2009/05/31/your-money/stocks-and-bonds/31fund.html?_r=1&emc=eta1

I'll be sure to remind you..........lol.

Darrell, you may be right. Stansberry's Short guru, Jeff Clark wrote on Friday that he and a bunch of his friends who trade for a living think there is some monkey business going on in the pits. They are all massively short in the market and so far losing their shirt. With so much big money shorting stocks, the market should be moving down. But so far the Bulls are winning. We know the government has done everything it can to prop the market up with the treasury and the media. Maybe they are also working behind the curtain?

An excellent observation spread. I spoke with my Dad this morning. He pulled out all his 401K money back in mid 2008, and he's not planning on moving a penny back in until the government stops spending money. There's a lot of people like him out there, who have enough money in their account to ride this one out. But those could also very well be the people who may start jumping in. My dad did say he would only go back into the market by buying gold and silver stocks, and only do it with 25% of his money. He could be tempted if gold breaks above 1000.

spread. I'm looking to at least 6 mo. down the road and am confused by what I know and timing what I want to profit from without losing. Since I'm gambling so much in metals, bios, oil and gas..I am not in fear of missing out, just wanting to know when to move some money oneway or the other. Kell, it's about profits..right. Education is what I looking for more than anything, I guess and you have a good brain to pick.

Here's an interesting article on ETF inflows and outflows for May and 2009 overall:
http://finance.yahoo.com/news/Investors-Pour-17-Billion-indexuniverse-15442042.html?.v=2

It seems that for every 2.4 dollars put into bearish inverse ETFs, 2.5 dollars were put into regular ones, indicating people are jumping back in. I was wondering why the bears were losing. This would certainly support spread's idea that foolish investors are thinking they missed the rally. But it's extremely close. All it would take would be one piece of uncertain or bad news to push the bears ahead. I don't see that this week. In fact, banks are set to repay more TARP funds than previously estimated. People love to go on spending sprees based on better than estimated news. So the Bull is probably still in charge.

Maybe gold breaking $1,000 could be the catalyst for a bear run.

SC10 pointed out to me that BOTH VXO and VIX have negative weekly momentum as of 5/22/09; and thus the weekly momentum for VIX is NOT positive.

I see that the DW&A chart says that today. However, I swear that I read that the weekly momentum for VIX had turned to positive as of 6/5/09. The reason I believe that is because I doubled checked it thinking it was an anomaly.

I suppose it is possible that I was looking at another chart. But this isn't the first time (I think) that they've changed up on me like that. I think it's a "computer" thing.

.......anyhow, sorry for the mistake (whether it's mine or some computer).

The implication of having negative weekly momentum for both VXO and VIX is intermediate term strength in the stock markets.

Interesting pattern http://stockcharts.com/charts/performance/perf.html?$VIX,dia,spy,qqqq
right click the 200day bar and select 30 days then slide it over to current.