Theory Behind the CVR (Connors VIX Reversal) Signals

The theory behind the CVR (Connors VIX Reversal) signals is that volatility will revert back to its mean (average). You’ve probably noticed that the CVR III signals often occur one-to-two days before the market turns. This is because the CVR III is simply a measure of when volatility is “stretched” away from its mean.

The CVR III occurs when the low of the VIX is greater than its 10-day moving average and it closes at least 10 percent away from the average. It does not take into consideration whether or not volatility has begun to revert back to its mean. Think of it as an “overbought” or “oversold” indicator. The further away the volatility is stretched, the bigger the move once it begins to revert back to its mean. This is why when you get a CVR I or a CVR II, both of which require an actual reversal in volatility, combined with CVR III, it often leads to substantial market moves.

Therefore, use the CVR III as a “get ready” signal and wait for the actual reversal (say, a CVR I or CVR II) to occur. For more aggressive traders, you might want to get a head start on the other VIX signals by looking for intraday price reversals any time a CVR III signal exists.

Markets to Watch: Low-volatility situations in the Gold and Silver Index [$XAU.X>$XAU.X] and April Gold [GCJ9>GCJ9] may make them worth considering.

Even though March pork bellies [PBH9>PBH9] made a large move today, the volatility still remains relatively low. Keep an eye on the contract as false moves often occur out of low- volatility situations.

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