Don’t get too worked up about today’s still selling. After a pretty good six-day stretch (4 winning days, and 2 flat ones), a little bit of a pullback could be expected. The bigger uptrend is still intact. In fact, this selloff today may end up being an important clue to bigger, more bullish things. It will give the trend a chance to verify that it has some staying power by (1) surviving a selloff, and (2) rebounding from a selloff.

However, that’s not really what I wanted to focus on right now. What I wanted to point out was the VIX. Its chart is the reason we don’t need to get overly worried about today’s action.

If I haven’t introduced Bollinger bands to you guys yet, get ready for a crash course.

Bollinger bands are just standard deviations wrapped around a chart’s moviing average line. In other words, 20-day, 2 SD (+/-) Bollinger band lines are plotted 2 standard deviations above the 20 day average, and 2 standard deviations below the 20 day average.

(If you’re not into statistics and math, don’t worry…I’m not either. The only thing you need to be able to do is visually recognize and use Bollinger bands. It’s infinitely easier than calculating them.)

Since a picture is worth a thousand words, let’s just use one. This will all make sense then.

In a nutshell, Bollinger bands tend to act as limits - support and resistance - most of the time. Once a chart runs into a Bollinger band, a reversal is likely. It works both bearishly and bullishly. There are cases, however, where Bollinger bands not only don’t repel a stock, but actually provide a guiding line for a continued trend.

That’s the upside and downside of Bollinger bands….they’re useful, but can also require two completely conflicting interpretations. Learning when to apply which strategy is more of an art than a science.

Anyway, the most common Bollinger band settings for traders seem to be 20 day band lines, at 2 standard deviations.

So what does any of this have to do with the VIX? The VIX ran into its lower Bollinger band yesterday; it appears to have pushed off of it today. This is almost a textbook example of how the lower band line acts as support, or a reversal level. Take a look.

So, it’s not entirely surprising to see today’s pullback. This was the area where it should have started to happen.

Now, there’s no sense in ignoring the 800 pound gorilla sitting in the room. How come the upper Bollinger band didn’t push the VIX lower back in September? If it’s a reversal point now, why wasn’t it a reversal point then?

Great question. There’s no single correct answer. That’s why I mentioned above that there’s an upside and a downside to Bollinger bands, and interpreting them is an art. Truthfully, you never really know at the time whether a band line is going to send a chart in the other direction, or blaze a trail for the chart to keep heading in its present direction. Either way though, the Bollinger bands can show you the moment of inflection…..the proverbial fork in the road. Once the Bollinger band doesn’t reverse the trend, you can usually count on a pretty long continuation like we saw in September. It ain’t a perfect tool, but it’s a good one when used in conjunction with other tools (like your brain).

More pertinent to today, based on the way the band lines prompted the reversal, I’m not worried just yet - this was to be expected. As long as the 10 or 20 day moving averages for the VIX keep the VIX’s upward move contained, this bearish reversal won’t mean too much.

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