The stock market is set up for a one- or two-day smackdown, similar to what we saw in mid-April and mid-August.
The Volatility Index (VIX) has spiked more than 10% since Friday’s closing level, even though the S&P 500 hasn’t budged. This sort of rise in the VIX while the stock market doesn’t go anywhere is often a warning sign that there’s a big, quick drop coming.
Look at this updated chart of the VIX…
You’ll recall I showed you this chart just last week. Back then, we noted that the width of the Bollinger Bands was at the smallest distance of the year. A similar condition in August occurred just before the VIX surged 60% higher.
Now we have another similar condition on the chart…
On Monday, the VIX closed above its upper Bollinger Band. This is a rare condition that only happens a few times each year. It means that volatility has increased rapidly.
It often occurs with oversold conditions in the broad stock market. And it eventually leads to a buy signal for stocks when the VIX closes back inside the bands.
But… and this is a really big BUT… when the Bollinger Bands are tight – as they are today and as they were in August – the first move above the bands is a breakout move for the VIX. It’s the beginning of a big move higher in volatility. And that usually comes with a big move lower in the stock market.
Here’s how the S&P 500 performed when the VIX made this move back in August…
The S&P 500 dropped from 2480 down to 2440 in just three days. That’s 40 points, or almost 2% – with the bulk of the drop happening two days after the VIX first closed above its upper Bollinger Band.
A similar move this time around would knock the S&P 500 down to about the 2530 level over the next day or two.
It doesn’t have to play out that way, of course. But I like the odds of a quick decline from here. And I’ve added some small short exposure to my portfolio, just in case.
Best regards and good trading,
Jeff Clark
P.S. Did you see what happened to bitcoin yesterday?
After trading as high as $5,895, the price of a single bitcoin dropped to $5,460. That’s a 7% drop in just a few hours. Is this the start of a big correction in the cryptocurrency space? Or is this a buying opportunity ahead of a major rally?
I can’t tell you. But my colleague Teeka Tiwari can. Teeka is my go-to expert for everything related to digital currencies.
If you’ve ever considered trading bitcoin, or any of the dozens of other cryptocurrencies, then you should follow Teeka’s lead.
Teeka is hosting a special educational webinar on digital currencies on November 2 at 8 p.m. ET/PT. You can sign up for it right here…
Reader Mailbag
In today’s Mailbag, we hear about two readers’ experiences with the recent HOG earnings trade…
For Jeff's latest guidance on this trade, click here.
The HOG trade was too thin. You could hardly get in and out. I would not have recommended it to us.
– Otis I.
Jeff, just read your latest update, I don't understand why subscribers don't get it!
Is being a subscriber of a newsletter mean that YOU hold their hand through the entire trade and common sense goes out the window? If folks got stuck in the trade then they were not watching it. Earnings trades are risky. You even said to be ready to sell quickly! If you (the subscriber) were actually watching the trade, you would have seen that the option was hitting a lot of resistance at $2.05—it went back and forth for half an hour before it pulled back. That is when you should have sold during this resistance. It was a scalp/day/earnings trade. I was able to sell at $2.00 today after my internet came back up.
It cracks me up. I have traded with you on the Congo using a puck, 30,000 feet on Wi-Fi from a plane, and now here in Baghdad and somehow I manage to trade.
– Karl H.
Lately we’ve been getting a lot of feedback related to the Jeff Clark Trader mobile app (here are the links for Apple and Android) the website, and how they can be improved. For those having issues, just know that there’s a massive update in the works which should be in your hands in the coming months…
Thanks for the great trades. Learning from you and profiting.
I am confused about today’s trade not getting an alert and not being able to see it on Android. I am in no way blaming anyone just found it very odd I could not find the recent Delta Report issue. No place could I find the new trade you mentioned you would be sending in email in 30 minutes. Never saw the email either. Searched through it everywhere.
Was this just me? On my desktop I did find the alert and created a limit order. Thanks again and I want to repeat, I am not accusing you or the site of any issues only asking if this was an issue only for me or was something up?
– Douglas C.
Editor’s note: Thanks for writing in, Douglas. There was a minor technical issue with the site which caused yesterday’s web posting to be delayed. But the good news is, you can still enter the position at the recommended price…
Also, Delta Report issues are always mailed out at 10 a.m. ET. And you should have the domain whitelisted from when you started your service. If you’re still having issues receiving your letter, make sure to contact customer service here.
And as always, be sure to send in your trading stories – along with any questions, suggestions, or concerns – right here.