The Volatility Index (VIX) generated its seventh buy signal of the year last week. And, just like the previous six signals, this one marked the bottom of a decline phase and was followed by new all-time highs for the S&P 500.

On Monday, I suggested that the combination of bullish seasonal trends this time of year – plus the new VIX buy signal – could push the S&P 500 to new highs by the end of the week.

But it only took until Tuesday.

So, now what? Are stocks going to race immediately higher? Will we get a pause in the action? Or are we setting up for one of those sharp, one-day drops that show up out of nowhere?

That’s hard to say.

Seasonal trends remain bullish through the end of the month. The S&P is trading above both its 9-day exponential moving average and its 50-day moving average – so the momentum is bullish as well.

But a couple of my favorite technical indicators have climbed into overbought territory. This condition should limit the upside for the stock market.

And, on at least a few occasions this year, it has led to some short-term downside action.

Take a look at these charts of the McClellan Oscillators for the NASDAQ and NYSE…

Both of these indicators help to measure overbought and oversold conditions. And they both closed above their upper Bollinger Bands on Monday. They extended even farther above the bands yesterday. So, they’re flashing a caution sign.

That’s not a reason to sell everything and head for the bunker. It’s certainly not a reason to pile on a bunch of short sales. But it is reason enough to hold off on putting new money to work in the stock market.

The upside is limited from here… at least until the McClellan Oscillators have worked off their overbought conditions.

It doesn’t matter whether that gets worked off by a sudden move lower in the S&P 500, or if the index just chops back and forth for a few days. The bottom line is there’s no reason to rush in and panic buy stocks out of fear of missing the year-end rally.

Traders will likely have a better chance to buy stocks in the days ahead.

Best regards and good trading,

Jeff Clark

P.S. My “crystal ball” VIX buy signal is just one of the many different techniques I use to spot short-term, high-upside trades for my Delta Report subscribers.

It’s how I’m able to hand them winners like 185% in 1 day on Paypal… 200% in 29 days on Ford… and 343% in 11 days on Martha Stewart Living – week after week.

To learn more about the Delta Report, and perhaps the most formative trading day of my career, click here.

Reader Mailbag 

In today’s mailbag, we hear from some happy Delta Report subscribers…

I commend you on your fine publication. I am subscribed to other publications that almost turned my option trading into a full-time career. Your service is, by far, the best advice, communicated regularly to let me in to the thinking behind your recommendations.

Thanks for your work!

– Don B.

I do appreciate your daily comments and suggestions. Very helpful in following through on my investment strategy.

– David C.

And stand corrected on some “terrific” word choice…

Hello. In Friday’s mailbag, you wrote: “For me… It’s terrific motivation.” I have always had a beef with people using “terrific” in a positive connotation.

Yes, the dictionary has it as an informal usage to the positive, but that came about through the bastardization of the English language. The root is from Latin: terrere, “to frighten”.

Think of it this way; are you a terrorist because you had a terrific day? Probably not.  There are many other words that can be used to describe your delight in something or someone. Just saying.

– Dana D.

As always, please send in your thoughts… and any other questions or suggestions… right here.