After generating a buy signal just a few days ago, the Volatility Index (VIX) is now on the verge of a sell signal.
Unlike buy signals, which happen on average four or five times per year, VIX sell signals are rare. We only get about one each year. And, the length and severity of the sell signals are much different than the buy signals.
VIX buy signals tend to play out with the broad stock market making an immediate, quick upside move – just like we’ve seen this week. Buy signals can play out in a matter of days.
VIX sell signals take longer to get started, and they tend to lead to intermediate-term declines. For example, we wrote about the VIX sell signal that occurred back in March 2022.
The stock market continued higher for about one week after the signal. But, once the selling started, it continued for several weeks.
The S&P 500 was trading above 4600 in late March of 2022. Three months later it was near 3700.
We don’t have a VIX sell signal yet. But, one could happen any day now.
Here’s an updated chart of the VIX along with its Bollinger Bands…
The VIX generates trading signals when it closes outside of its Bollinger Bands (BB – solid blue lines), and then closes back inside the bands.
The blue arrows on the chart point to all of the VIX buy signals so far this year.
We don’t have any sell signals so far in 2024. Indeed, it has been nearly two years since the last one.
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But, the VIX closed below its lower Bollinger Band on Wednesday. When it closes back inside the bands, the VIX will generate its first sell signal of 2024.
And, if this one plays out like the sell signal from March 2022, the stock market could be in for a difficult holiday season.
Given the strong track record of this indicator, investors should be careful not to chase stocks higher into any strength over the next few days.
Best regards and good trading,
Jeff Clark