When investors are worried that the stock market will go down or are trying to prevent further losses, people will buy puts. When a lot of people demand puts, the demand is more than supply, hence prices of puts go up. When prices of options go up, implied volatility goes up and hence the VIX index goes up.

In contrast, when market participants do not fear the market heading downward, people will refrain from buying puts. Less demand, lower prices, lower VIX index.

At times when everyone is bearish, the VIX index is high, these make good times to buy stocks. The reasoning being that if everyone is bearish, there is no one else to sell. No sellers, no more downward pressure on stocks. A visual picture of the inverse relationship between the VIX and price shows this concept well: VIX Index.

Likewise, when everyone is bullish, the VIX index is low; these times are excellent points to exit long stock positions. Logically, if everyone is bullish, then there is no one else to buy. With no buyers, there is no more upward pressure on stocks.

In summary, the VIX is a great contrary indicator. The traders mantra after all is "When the VIX is high, it's time to buy, when the VIX is low, it's time to go."

Another closely related techical analysis indicator is the Volatility indicator. This indicator measures actual price volatility instead of future option implied volatility.

Tom Markelson is a contributor to the website http://www.OnlineTradingConcepts.com/TechnicalAnalysis.html with a background in stock, futures, and options.