2022 is starting off as a tough year for investors.
As of Tuesday, the Dow is down 2.7%… The S&P 500 is down 4%… And the Nasdaq is down more than 7%.
Conditions have gotten quite oversold. So far, anyone buying into those oversold conditions has suffered from even more selling pressure.
But, that’s about to change…
It looks like the Volatility Index (VIX) is on the verge of generating its first buy signal of 2022.
Take a look at this chart of the VIX along with its Bollinger Bands …
The VIX started the year at a rather complacent level below 17.
As the selling pressure kicked in over the past three weeks, the VIX has exploded above 23. That’s better than a 40% increase in volatility to start the year. And, it has pushed the VIX above its upper Bollinger Band.
Bollinger Bands illustrate the most likely trading range for a stock or an index. Whenever the VIX trades outside of its Bollinger Bands, it indicates an extreme condition that’s likely to reverse. And, those reversals create trading opportunities.
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The VIX closed above its upper Bollinger Band on Tuesday. When it closes back inside the bands, the VIX will generate a new, broad stock market buy signal. That could happen as soon as today…
VIX buy signals were quite reliable in 2021. Eight out of the 11 buy signals proved to be profitable.
Traders who bought the S&P 500 on the last buy signal in early December saw that index rally nearly 7% over the next three weeks.
Of course, there’s no guarantee that something similar will happen this time around.
But given the current oversold conditions, it looks to me like the stock market is setting up for at least a strong oversold bounce.
And, a VIX buy signal might be the catalyst that gets it started.
Best regards and good trading,
Did you buy during the last buy signal? If so, do you think the VIX is a reliable indicator?
Let us know your thoughts – and any questions you have – at [email protected].