Most of us as traders and simply as human beings seek clarity.
We innately feel the need to make sense out of chaos. We want answers. We want black or white. Gray makes many of us uneasy.
So, there are often times when faced with the complex world that is trading, we want to boil things down into one universal truth, a methodology that we can apply wherever we go. Problem is we often find ourselves trying to put a round peg in a square hole. Let’s take a look at VIX. In general, equity pricing is a rational process.
There is at the very least some solid math and modeling used to determine the actual worth of the company. I will give you that the modeling can involve some subjective components, but on the whole, technical analysis gives us some insight into what the market deems a fair price. From there, we can establish supports and resistances, etc. Technical analysis is a valid tool to use in your trading methodology.
But what about something like the VIX? Here comes the round peg, square hole. Since we can produce a price chart with VIX prices, many traders first instinct is to try and perform some sort of technical analysis. The problem I find with this is that VIX is, for lack of a better term, a fear index.
Perhaps during periods of market calm you can predict trading ranges, but there is one thing for certain, fear (or the lack of it) is not rational, trying to predict an irrational data set is arbitrary at best.
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