The Volatility Index (VIX) generated a sell signal yesterday.
Longtime readers know that VIX sell signals occur when the Volatility Index closes below its lower Bollinger Band and then rallies to close back inside the bands. And if this current sell signal is anything like the last one, then stocks are in for a rough week.
Take a look at this chart of the VIX…
The VIX closed below its lower Bollinger Band last Wednesday. It stayed below the band on Thursday and Friday. But yesterday, the VIX rallied and closed back inside its Bollinger Bands. That’s a sell signal.
Notice also how oversold the MACD and RSI technical indicators are at this point.
This is only the second sell signal we’ve seen from the VIX in about two years. The first signal triggered less than one month ago on April 18. Here’s how the S&P 500 responded to it…
Following the sell signal last month, the S&P 500 lost 100 points in less than a week. A similar move this time would knock the index back down towards the 2620 level by Friday.
Traders need to remember: The market will do whatever it needs to in order to inflect pain on the most participants. Think about what would cause the most pain right here…
Most traders were chasing last week’s rally. They were underinvested when the market started to bolt higher last Wednesday. They saw the breakout from the triangle pattern I was showing you all week. That breakout opened up the possibility for a rally to new highs.
Folks needed more exposure. So they piled into the market despite overbought conditions. That’s why I warned on Thursday that the breakout may not hold.
Now imagine the pain if the market turns back down from here and gives up last week’s gains.
I think that’s the sort of move we’re likely to see. It will shake out the folks who chased stocks higher. And, if the decline can create some oversold conditions, it may just create a more significant bottom on the S&P 500. From there, traders can look to add some long exposure in anticipation of a rally into the summer.
For now, though, the market is likely to get hit with some selling pressure this week.
Best regards and good trading,
Jeff Clark
P.S. Just when everyone thought it was safe to get back in the water…
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Reader Mailbag
Today, a Delta Report subscriber comes to Jeff’s defense…
I read today that you took a lot of criticism on your GME naked put trade last Friday. Although I am not in the trade, just wondering why the criticism? Oh, I know—you’re supposed to know when a CEO is going to resign unexpectedly.
I really enjoy your service and, when I am not being stupid, I make good, consistent money with your recommendations.
– Randy
And a Market Minute reader chimes in with their experience…
I want Jeff to know we appreciate his help. Since we’ve been following just his Market Minute free email articles, we’ve made over $100,000 in two months. Give Jeff a chance. No one is perfect. I’ve been trading for 20 years. Jeff is one of the best pros out there. I’ve seen a lot of traders to measure him by in over 20 years of trading.
Thanks always, Jeff, and yes, per your email today we just went 100% cash today to protect profits from the April 2 area.
– Greg
Thank you, as always, for your thoughtful insights. Keep them coming right here.