The Volatility Index (VIX) sell signal finally kicked into gear yesterday.
Two weeks ago, the VIX triggered a broad stock market sell signal by closing below its lower Bollinger Band and then closing back above it. But up until yesterday, the stock market really didn’t do anything. The S&P 500 was at 2730 when we got the sell signal. It closed at 2730 last Thursday.
But the sellers woke up yesterday. And, at one point, the S&P 500 was down over 40 points.
Here’s an updated look at the 15-minute chart of the S&P 500, which shows the effect of the two VIX sell signals we’ve seen in the past six weeks…
The current sell signal has been much less severe than the signal in April. Back then, the S&P 500 lost 100 points in about one week. Under the current sell signal, the S&P has taken twice as long to lose half as much.
So, while yesterday’s 40-point loss looks harsh – because it all happened in just one day – the overall selloff has been quite mild. And it looks like it will soon be over.
You see… the VIX is now on the verge of a buy signal.
Take a look at this chart of the VIX along with its Bollinger Bands…
VIX buy signals occur when the index closes above its upper Bollinger Band and then closes back inside the bands. The S&P 500 rallied 125 points in just over two weeks following the buy signal we got in early April.
Yesterday, the VIX closed above its upper Bollinger Band. We’ll get another VIX buy signal when the index closes back inside the bands. That may happen as early as today.
Traders who shorted the stock market based on the VIX sell signal two weeks ago ought to consider taking profits on that trade today. The VIX is on the verge of a new buy signal.
Best regards and good trading,
Today, Market Minute readers respond to yesterday’s essay, “How to Consistently Win in the Stock Market”…
Jeff, that’s brilliant! It probably explains why you’re one of the exceptional traders that can make money buying options. I always found my biggest problem was holding the winners too long and going home with the goat! Keep up the great work.
Great perspective, great education.
Thank you, as always, for your thoughtful insights. Keep them coming right here.