The Volatility Index (VIX) triggered a new buy signal when it closed back inside its Bollinger Bands yesterday. We should see higher stock prices over the next few weeks.
Look at this chart of the VIX…
Bollinger Bands (the blue lines) indicate the most probable trading range for a stock or an index. Whenever a chart moves outside of its Bollinger Bands, it signals an “extreme” condition. In the case of the VIX, these extreme conditions trigger buy and sell signals for the broad stock market.
Sell signals occur whenever the VIX closes below its lower Bollinger Band and then closes back inside the bands. Buy signals occur when the VIX closes above its upper Bollinger Band and then closes back inside the bands.
Yesterday marked the fourth VIX buy signal of 2018 so far. The red circles on the chart encompass each buy signal.
Here’s how the S&P 500 behaved following the previous three signals…
The stock market continued lower following the first two buy signals of the year in early February and late March. Traders who took advantage of that immediate weakness and bought stocks were rewarded quite well as the S&P gained more than 100 points – roughly 4% – over the next three weeks.
The buy signal in late May was a slightly different animal. The signal triggered following a one-day, massive 37-point rally in the S&P 500. That rally used up a lot of energy and likely limited the potential upside of the signal.
Nonetheless, the S&P 500 still gained about 45 points within just a few days of that signal.
Now we have a brand-new buy signal that triggered yesterday, following a modest six-point gain in the S&P 500.
So, this signal looks to me like it’s more similar to the first two signals on the chart. In other words, we may not have seen the absolute bottom of the recent decline phase.
Stocks may head a bit lower one more time. But traders who buy into that decline should be well rewarded over the next several weeks.
Best regards and good trading,
Jeff Clark
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