The stock market has done a great job of reminding traders that low levels of volatility are ALWAYS followed by high levels of volatility, and vice versa.
We got the “higher levels of volatility” this week. And for next week, it looks like we’re set up to get a little “vice versa.”
Take a look at this updated chart of the Volatility Index (VIX)…
The VIX is on the verge of generating a new, short-term broad stock market buy signal. VIX buy signals occur after the index closes above its upper Bollinger Band, and then closes back inside the bands.
The VIX has closed above its upper Bollinger Band for two straight days. And, if the VIX closes lower at all today, it is likely to close back inside the bands – and generate a new, broad stock market buy signal.
Over the past year, the VIX has generated four other buy signals. They’re circled in blue on the chart above.
Here’s how the S&P 500 performed following each of those signals…
All of the buy signals occurred at the end of at least a short-term downtrend. And all of them led to at least a short-term rally in the broad stock market. Heck, even the small blip higher following the VIX buy signal in May was good for about 80 S&P 500 points.
There has been a lot of technical damage done to the stock market this week. There’s a good chance the recent high of 3028 on the S&P 500 may prove to be the top of this 10-year long bull market. That means stock prices may be headed lower, perhaps much lower, in the weeks and months ahead.
But, for the next several days anyway, traders should be aware of the potential for a VIX buy signal. If it happens, we’ll likely get a pretty good bounce higher in the market over the short term.
Best regards and good trading,
P.S. Regular readers know I don’t usually make public appearances. But I recently made an exception…
You see, I just had to get something out there. So, I got together with a select group of investors behind closed doors and delivered a talk. It detailed a specific strategy… one I used to start my own money management firm, navigate volatile markets, and to retire 25 years early. In short, it was too good not to share with you.
This is essential viewing for anyone with money in the market right now. But my publisher is only keeping it up until Sunday night. You can watch the entire presentation I gave right here.