Trading off the Volatility Index (VIX) over the past few weeks would have been a profitable strategy. It just might produce profits this week as well.

Earlier this month, we pointed to the low reading in the VIX, and the record speculative short position in VIX futures contracts as a warning the stock market might be in for a rough period. The S&P 500 peaked shortly thereafter, and tumbled more than 4% in two weeks. Meanwhile, the VIX spiked from below 13 to an intraday high above 22 – a gain of almost 70%.

A few days ago, we took another look at the Volatility Index, and noted it was on the verge of generating a broad stock market buy signal. The S&P 500 rallied 90 points from last Monday’s low to last Thursday’s high as the VIX fell all the way back down to 15.

That’s two solid trading signals from the VIX in about two weeks. And, it looks like we’re about to get another one. 

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Take a look at this 60-minute chart of the Volatility Index…

It looks like Friday’s decline in the broad stock market has caused the VIX to break out to the upside of a falling wedge pattern.

Admittedly, this isn’t the cleanest of wedge patterns. It’s a little too steep, and the support line doesn’t connect with all the “dots.” But, since the MACD and RSI momentum indicators both show positive divergence – meaning they’ve been moving higher while the VIX has moved lower – we might want to be a little less strict about the cleanliness of the pattern.

This chart looks to me like it has the potential to press higher again. And a rising VIX is usually accompanied by a falling stock market.

This is a 60-minute chart. And patterns on this time frame tend to play out within just a few days. So, if the VIX is going to move higher, then we should see that move get started sometime early this week.

Traders might consider taking advantage of any strength in the market early today as a chance to add some short exposure.

Best regards and good trading,

Jeff Clark

P.S. Because you read today’s Market Minute, you’re now better prepared for a market crash than the countless investors who didn’t. And I’m glad… because when stocks fall, most investors won’t know what to do.

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Reader Mailbag

In today’s mailbag, a Delta Report subscriber gives Jeff a quick thanks…

Let me say how much I appreciate your discussions about what’s going on in the market and how you see things. This is a great learning environment… thanks for the great service.

– Scott

Do you see a market crash coming in the near future? Why or why not?

Let us know what you see coming in the market, along with any other trading questions, stories, or suggestions at [email protected].