Today’s market is proving to be very interesting.  The Dow Jones was was up over 2% for the day and the S&P 500 was up over 1%.  With just 15 minutes left in trading, both indexes are in RED territory (-.4% for the the dow and -.6% for the S&P).  But if you are a short term trader, today proved to be a perfect day for watching the VIX indicator and getting out while the getting was still good.

Under normal circumstances, volatility goes up as the market goes down because traders are willing to pay a higher premium for option contracts when they expect a bounce back from the lows.  Similarly, volatility normally goes down as the market continues upward.  Take a look at this 1 day chart of the S&P 500 and the VIX index.

Take special note to the circled area.  Notice that even with the S&P 500 up over 1%, the VIX was also up about the same 1%.  The VIX can be an excellent indicator of investor/trader sentiment, and today’s chart clearly shows, according to the VIX, that traders were not buying into today’s early rally.  At 12:00pm the VIX started it’s path toward the 2% daily gain mark, as the S&P slowly tapered off the 1% gain mark.  That early warning would have been an excellent opportunity for short term traders to heed, and protect their positions.  In fact, most traders did exactly that as we can see from the late day losses in the market.  The crucial key to day trading the markets is to see the early sentiment warning signs and beat everyone else to the exit door.