The S&P 500 closed Friday at 4181. That’s pretty much where it closed the Friday before, and the Friday before that.
In other words, despite some intraweek moves above and below that level, the stock market hasn’t really done anything for two weeks.
So, energy is building. There’s a big move coming…
And, my guess is that big move will be to the downside – at first.
Take a look at this chart of the Volatility Index (VIX)…
The blue lines on this chart are the Bollinger Bands (BB) for the VIX. For most stocks, these bands show the most likely trading range. But, for the VIX… It’s a little bit different.
When it comes to the VIX, periods of low volatility are always followed by periods of high volatility, and vice versa. So, the BB helps us spot periods where volatility is likely to expand.
For example, whenever the BB pinch together – a condition caused by a period of low volatility – we often get a surge in volatility soon afterwards.
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The red arrows on the chart point to those times over the past year when the BB pinched together. In each case, the VIX spiked higher. And, that spike in volatility coincided with a short-term decline in the broad stock market.
The S&P 500 dropped 8% in one week during the VIX spike last September. Then, it fell 6% in a week last October. And, the volatility spike this past January coincided with a 3% drop in the S&P 500 in two days.
As you can see from the chart, the BB is pinching together again. We’re likely to see another spike in the VIX – perhaps as early as this week. And, that means we’ll likely see a decline in the stock market.
The good news, though, is that all of the previous spikes in volatility led to a good time to buy stocks.
So, once we get through the next week or two, traders should have a chance to buy stocks in anticipation of a summertime rally.
Best regards and good trading,
What trades are you looking to get into for a possible summertime rally? Do you think being patient will pay off as a result?
Let us know your thoughts – and any questions you have – at [email protected].