The stock market blasted higher last week.

The S&P 500 gained 2% – its best performance in quite some time. The index is now in positive territory for the month. And I expect the gains to continue.

For most of the past two weeks, the market action has been constructive for the bulls. The S&P 500 has been making higher lows and higher highs – which indicates bullish momentum. And, so far at least, the technical indicators have avoided reaching into overbought territory. So there’s still enough fuel to power the market even higher.

But, as a trader, I’m always on the lookout for conditions that might cause a change in the forecast. It’s like a sailor looking out for storm clouds on the horizon.

The seas are relatively calm right now. The skies are clear. It should be smooth sailing ahead for the bulls in the short term.

But there is a small patch of turbulent air just a few nautical miles ahead. It’s nothing right now. And it may never amount to anything later on. But traders should keep an eye on it just in case.

I’m referring to the current setup in the Volatility Index (VIX). Take a look at this chart of the VIX plotted along with its Bollinger Bands

The VIX is commonly referred to as Wall Street’s fear gauge. It rises as investors grow fearful. It falls when investors are complacent.

Extreme moves in the VIX are excellent contrary indicators. As traders, we look to buy stocks when the VIX makes an extreme move to the upside, and we look to sell stocks when the VIX makes an extreme move lower.

Bollinger Bands measure the most probable trading range for a stock or an index. Whenever a chart moves outside of its Bollinger Bands, it indicates an extreme condition – either extremely overbought or extremely oversold. Since the VIX is a contrary indicator, it’s best to buy stocks when the VIX is extremely overbought. It’s best to sell stocks when the VIX is extremely oversold.

Right now, the VIX is still inside of its Bollinger Bands. We don’t have any sort of extreme condition of which to take note.

But the VIX is approaching its lower Bollinger Band. If the stock market rallies early this week then the VIX is likely to decline. And it won’t take much of a decline to push the VIX below its lower Bollinger Band and set up the possibility of a broad stock market sell signal when the VIX comes back inside the bands.

For now, the skies are clear and the sea is relatively calm. But keep an eye on this chart of the VIX. It will tell you if there’s a storm on the way.

Best regards and good trading,

Jeff Clark

P.S. I’ll be keeping a close eye on the VIX as we head into the week, and especially as I put together this week’s trade recommendation. (Delta Report subscribers can read my strategy writeup for the coming week on Delta Direct right here.)

And if you’ve been thinking about a subscription, check out this video presentation. It details another of my favorite indicators to use when searching for short-term, high-upside opportunities in the options market.

Reader Mailbag

Today, two readers’ thoughts on the Delta Report

I really enjoy your work and have profited greatly both following you with your previous company and now subscribing to your new service. I am doing better this time even than before and the main reason is money management on my end – which, in my opinion, would be the most valuable addition to your service. With a win rate like yours, that is where money is made and lost. I’ll send more details on my experience soon.

– Alan

And the Minute

Hey Jeff and team. I have been familiar with your work for 5 or 6 years now, since your days at Stansberry, but never really had capital to trade with until I built a small stake in an IRA over the last couple years.

I followed your recommendations last week and bought SPY calls as the S&P was falling into the latest trough. I started buying a little early Friday when SPY was around $262, then doubled down as it dipped down into $258 at the end of the day, rode it up to a little better than 100% gain by Tuesday, and closed half my position to take my money and some profit off the table. I’m still watching the rest of the position creep up, hoping for that big push back up to $280.

My meager IRA is about 20% healthier so far from this trade. Another opportunity or two like this, and I’ll be able to justify becoming a paid subscriber. Looking forward to that day! Thanks.

– Daniel

Thank you, as always, for your thoughtful insights. Keep them coming right here.