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Chapter 7. Volume Extremes, Volatility, ... > The Volatility Index (VIX) and Signi...

The Volatility Index (VIX) and Significant Stock Market Buying Zones

Periods of very high and rising stock market volatility, the rate at which stocks change in price, usuallyaccompany stock market price declines. Stock market bottoms are often accompanied by a reduction in volatility, which usually runs higher during market declines than market advances. Chart 7.3 and others in this series of charts illustrate historical relationships between volatility levels and price movement over the decades.

Chart 7.3. The Nasdaq Composite and VIX, 1990–2004

VIX, an indirect measure of stock market volatility and investor sentiment, reaches a level of 35 only infrequently. Such levels generally represent excellent buying opportunities. Investors have been safe from market declines of any significance until VIX has fallen from above 35 to 18 or below, although readings below 18 do not constitute sell signals in and of themselves. Vertical lines indicate areas in which VIX has risen to above 35. You can see periods when VIX subsequently declined to below 18.



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