Stocks are headed higher this week.

Yes, I know that sounds crazy. Most folks are expecting chaos in the stock market. After all, COVID-19 cases are spiking higher. Europe is locking down. And, major cities in the U.S. are preparing for riots following whatever happens on Election Day.

You’d have to be crazy to expect stocks to rally in this environment.

Or would you?

On Friday, the Volatility Index (VIX) generated a buy signal by closing back inside its Bollinger Bands. These sorts of buy signals have a fairly good record of happening right before solid, short-term rallies in the stock market. And, as we pointed out a couple of weeks ago, VIX buy signals in October tend to lead to strong multi-week stock market rallies.

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To repeat what I wrote back then…

The S&P 500 rallied 9% in about nine weeks following a VIX buy signal last October. In 2018, an October VIX buy signal led to a 4% gain in the market in just three weeks. The same thing happened in 2017.

And, in 2016, the S&P 500 rallied nearly 10% in November.

So, with Friday’s Volatility Index buy signal, it looks to me like we’re set up for a strong move higher this week, and perhaps for the entire month of November. The intraday charts of the S&P 500 support that idea as well.

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For example, take a look at this 60-minute chart of the S&P 500…

The S&P 500 fell 200 points over the past week or so. As a result, technical momentum indicators – like the Moving Average Convergence Divergence (MACD) and Relative Strength Index (RSI) at the bottom of the chart – dipped into extremely oversold territory.

But, as the market plunged lower on Friday, the MACD and RSI indicators held above their previous lows. This sort of “positive divergence” – especially when it appears on the intraday charts – is an early warning sign of a potential bounce in the market.

A similar setup in late September led to a 300-point rally in the S&P 500 in just three weeks. It looks to me like we’re setting up for something similar this time around.

Best regards and good trading,

Jeff Clark

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Reader Mailbag

Are you expecting chaos in the stock market this week, or will you be looking for a rally like we’ve seen in the past?

Let us know your thoughts – and questions you may have – at [email protected]trader.com.

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