The stock market just triggered the seventh Volatility Index (VIX) buy signal of the year. The previous six buy signals generated big gains within just a couple of weeks.
And, this buy signal could do the same…
The VIX spiked sharply higher on Monday. It popped above its upper Bollinger Bands (BB). And, it closed at its highest level since May.
Take a look at this VIX chart…
The blue lines on the chart are the Bollinger Bands. They show the most probable trading range for a stock or an index. For the VIX, though, Bollinger Bands also provide strong trading signals.
As we’ve seen many times, whenever the VIX closes above its upper BB, it indicates an extremely volatile condition – which usually occurs during a steep decline in the stock market.
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Then, when the VIX closes back inside its BB, it generates a broad stock market buy signal. Previous signals are marked with a red arrow on the chart.
Here’s how those signals played out on the S&P 500 so far in 2021…
The VIX buy signals didn’t always mark the exact bottom of the decline phase. But, the S&P 500 was higher a few weeks later – every single time.
Of course, that doesn’t guarantee the market will be higher a few weeks from now. But based on the action under similar conditions so far this year, the chances look pretty good.
The real question is whether this buy signal will trigger an intermediate-term rally lasting several months, like we saw in March, or if this rally flames out in just a few days and leads to an even more significant decline.
For the moment, I’m leaning towards the latter scenario…
Any rally from here seems likely to run out of fuel before making a new all-time high. That would create a “lower high” on the chart and set the stage for another strong decline.
But, we’ll worry about that situation when we get there.
For now, we have a VIX buy signal. So, the odds favor at least a short-term rally from here.
Best regards and good trading,
Are you anticipating a rally, or a decline in the market?
Let us know your thoughts – and any questions you have – at [email protected].