As you might have figured out already, sentiment looks at how people view the market. Many times, traders will use this information as a contrarian indicator. This means a trader might go short when the majority of traders are expounding on the profits to be made as the market heads higher. This goes along with the saying the majority of traders are right in the middle of a trend, but wrong at both ends. As the VIX increases in value, it says there is more fear in the market.
Fear comes into the market as traders start to throw in the towel.
The thing to remember is that extreme fear normally occurs at market bottoms. This is because most people have already sold their holdings, leaving very few people left to sell. The best way to see how to use the VIX is to compare the movement of the VIX to the market in general. Chart generated by RavenQuote charting software. As with any type of indicator, it is best to combine different types of analysis and several indicators to confirm where you think a stock or index might be heading, but using the VIX to note extreme levels in fear and complacency can help put the odds more in your favor.