Welcome to October.
This is the month for baseball playoffs, ghouls, goblins, and stock market crashes. So, with that in mind, let’s take a look at the scariest chart in the market right now… the Volatility Index (VIX)…
Most folks know the VIX is considered Wall Street’s “fear gauge.” When investors get spooked, the VIX goes up. When investors are complacent and comfortable, the VIX moves lower.
For most of the past five months, investors have been complacent and comfortable. But, that is about to change.
For the past few months, the VIX has been trending lower. But, all of the momentum indicators at the bottom of the chart have been moving higher. This sort of “positive divergence” often indicates the downtrend is losing momentum, and the chart is setting up for an upside reversal.
More important, though, is the recent action in the VIX. Over the past few weeks, the chart has morphed into an “ascending triangle” formation. This happens as the index chops back and forth, and each rally stalls at the same high, but each decline forms a higher low.
This is a bullish setup that often resolves with a breakout to the upside.
If the VIX can get above resistance at about 17.20, then it should be a straight shot to the next resistance line near 21. And, since a higher VIX tends to go along with a lower stock market, this setup is clearly bearish for stocks.
But, that’s not the worst of it. Remember… it’s October.
Listening to the financial television talking heads, most folks seem prepared for a modest pullback in the stock market. “A three to five percent correction would be healthy,” they say. “We’ll use it as a chance to buy in anticipation of a strong fourth-quarter rally.”
Just about everyone seems to agree with this prediction, and with this strategy.
Of course, the stock market rarely goes along with the popular opinion. It seems more likely to me we’ll get something other than a “healthy” correction.
We’ll either get no correction at all, and the market will just keep plowing higher.
Or, more likely based on the setup in the VIX, we’ll get a decline of more than 5% that causes the VIX to spike well above the 21 resistance level and creates a scary start to the fourth quarter.
Best regards and good trading,
Jeff Clark
Editor, Market Minute
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