The VIX says it’s time to buy… finally.
We came into last week on the lookout for a Volatility Index (VIX) buy signal. The VIX closed above its upper Bollinger Band on Friday, October 5. That indicates an extremely overbought condition for the VIX – which usually coincides with an extremely oversold condition for the stock market.
Regular readers know that the VIX generates broad stock market buy signals when it first closes above its upper Bollinger Band, and then closes back below it. So, on Tuesday I told you to “Get Ready to Buy.” I was expecting that after two days (Friday and Monday) above its upper BB the VIX was ready to trigger a buy signal.
It didn’t happen on Tuesday. The VIX moved even higher.
It didn’t happen on Wednesday either. Nor did it happen on Thursday.
Remarkably, the VIX closed above its upper Bollinger Band for five straight days. I can only recall that happening one other time – during the crash of 1987.
During that five-day period, the S&P 500 lost more than 27% of its value. The ensuing VIX buy signal helped the market recover about 40% of that decline in just a few days. But, the bounce quickly ran out of steam and the market dropped back down to retest its lows. That’s when we got a more sustainable rally.
Of course, last week’s decline didn’t even come close to the sort of damage caused by the crash of 1987. At Thursday’s low of 2725, the S&P was “only” down about 7% for the week. But, we can still use the pattern from 1987 as a roadmap for what to expect as the current VIX buy signal plays out.
For that matter, we can also use the correction from February as an example as well.
Here’s an updated look at the S&P 500…
Following the steep sell-off in early February, the S&P 500 bounced and recovered 62% of the decline. The market then rolled over and retested its February lows about one month later.
A similar bounce this time around could have the S&P trading back up to 2830 or so later this week. If the bounce is more similar to the action following the 1987 crash – when the S&P recovered 40% of its decline – then we’re looking at an upside target somewhere near the 2810 level.
Both of those targets will line up well with the 9-day exponential moving average (the squiggly blue line on the chart) – which is often stiff resistance following a strong decline.
From there, look for the market to dip back down and retest last Thursday’s low. That’s when we’ll have a better setup for a rally heading into the end of the year.
Best regards and good trading,
In today’s mailbag, one Delta Report subscriber thanks Jeff for sticking to his guns…
I feel for you Jeff, trying to make sense of a crazy market. It doesn’t always follow historic trends and that is frustrating for you and us. It is apparent that you are factoring experience into all these decisions you make and not just charts.
I appreciate the conservative approach you take and agree that it is best to wait for the best risks instead of “just trading to trade.” I can almost sense the frustration in you in trying to please everyone, but you’re sticking to your guns. There have been countless times that your patience has proven you right. Thanks.
And another Delta Report subscriber enjoyed one of Jeff’s Delta Direct updates (Delta Report subscribers can access the update here)…
Loved your hilarious update this morning on gold and gold stocks. I am invested in DGAZ [VelocityShares 3x Inverse Natural Gas ETN] and am under, but doing better today. You said you would not be short or long natural gas but it was too late for me. I should have known to wait since you are often early.
Are you still bullish on gold, like Jeff? Or are you focused on a different sector, like natural gas? If you have any other trading stories, questions, or suggestions, submit them here.