The Volatility Index (VIX) has “that look” to it again.

The stock market’s fear gauge closed Friday at 25.68. While that’s elevated, compared to the average level of about 15 all last year, it’s near the lowest levels we’ve seen on the VIX for the past four months. And, it’s just a hair above its lower Bollinger Band (BB).

So, if you weren’t already a little cautious because of the historically low put/call ratio, the extreme level of speculative activity in the markets, and the numerous other caution flags we’ve looked at over the past few weeks, then maybe the following chart of the VIX would nudge you in that direction…

The VIX is sitting just above its lower Bollinger Band (where the blue arrows are pointing). Long-time readers know the VIX generates a stock market sell signal when it closes below its lower BB, and then comes back inside the bands.

But, VIX sell signals are fairly rare – maybe just one per year. We do, however, get a lot of near-sell signals when the VIX is approaching its lower BB. This condition, when combined with other indicators such as a low put/call ratio, often leads to a short-term pullback in the stock market.

We’ve seen this setup a couple of times over the past two months. In May, the S&P 500 fell 120 points in three days. In June, the decline knocked more than 200 points off the index in about one week.

And, here we are again. The VIX is sitting just above its lower BB. And, a number of other indicators are flashing warning signs.

If the VIX continues lower today, it just may close below its lower BB and generate a stock market sell signal when it comes back inside the bands. If the VIX moves higher today, then it will likely indicate the start of a short-term decline in the market similar to what we saw in May and June.

Either way, the setup looks bearish for this week.

Best regards and good trading,

Jeff Clark

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