Market Pulse: Stock market patterns and tendencies, Vol. 1

The Nasdaq 100 tends to move in the opposite direction of the Nasdaq volatility index (VXN), but how can you profit from this relationship? Looking at how dramatic volatility index (VXN), but how can you profit from this relationship? Looking at how dramatic volatility changes have played out in the Nasdaq 100 tracking stock (QQQQ) over the past four years offers some ideas.

In Tracking VIX swings (Active Trader, January 2006) we studied the relationship between the S&P 500 and the Chicago Board Options Exchanges (CBOE) volatility index (VIX). The VIX is a popular gauge of market sentiment that measures implied volatility of near–term S&P 500 options.

Here, we apply the same approach to the Nasdaq 100 and its own volatility index (VXN) and discuss similar short–term patterns. The initial step is to develop a method for defining VXN extremes, and then to determine what happened in the immediate aftermath of these extremes. The approach is hardly foolproof, but it did uncover some noteworthy one–day patterns that merit further study.