The CBOE Volatility Index (VIX) is on the verge of generating a BUY signal.

Last Thursday, I noted that the chart of the VIX looked poised for a short-term spike higher. The June high of 18 looked like a reasonable target. And getting to that target would likely mean the broad stock market would have to sell off even more.

But, I also cautioned that sort of move in the VIX would set the stage for a broad stock market buy signal. And we now have the necessary setup for that signal.

Here’s an updated chart of the VIX…

The VIX closed above its upper Bollinger Band (the blue lines) on Friday. It spiked above our upside target of 18 yesterday, before coming back down and closing at about 16 – still above its upper Bollinger Band.

The VIX will generate a broad stock market buy signal when it closes back inside its Bollinger Bands. That can happen as early as today.

Regular readers will recall the last VIX buy signal triggered in mid-August, when the S&P 500 was at about 2840-ish. At the time, I doubted the validity of the buy signal. Most of the daily technical indicators were not oversold enough to support a strong stock market rally.

I was wrong. The S&P 500 gained about 70 points over the next two weeks.

So, despite my natural bearish leaning, I don’t want to discount the potential of the next VIX buy signal.

After all, we are entering a seasonally strong period for the stock market. After last week’s decline, many technical indicators have stretched into oversold territory – from which bounces often occur.

So, I’m going to park my bearish attitude on the sidelines temporarily. The market is setting up for a short-term bounce.

Here’s how I see things playing out…

The S&P 500 has broken down from a bearish rising wedge pattern. The downside target of this pattern measures to somewhere between 2875 and 2850. The low of the day yesterday was 2862. So, with the low of the day yesterday at 2862, we can consider the target hit.

Traders should also notice that the 50-day moving average line at about 2875 offers a pretty good support level.

If stocks do rally from here, in response to a VIX buy signal, then I suspect that rally will play out quickly. The S&P 500 could get up to about the 2920 level – which would then mark a lower high on the chart, and quite possibly establish the right shoulder of a bearish head and shoulders formation.

That pattern would lead to significantly more downside in the months ahead.

But, let’s not get too far ahead of ourselves. Here in the Market Minute, we try to focus on short-term trading opportunities. So, while I think the ultimate resolution of the current setup is bearish over the next several months, the next several days look bullish – especially if we get a VIX buy signal.

Aggressive traders can buy stocks today with the S&P near 2880. But don’t hang on to the trade too long. Traders should look to sell the S&P on a move back up towards 2920 or so.

Best regards and good trading,

Jeff Clark

Reader Mailbag

In today’s mailbag, one reader shares their take on the Treasury bond bounce…

The T-bond selloff… I believe it’s due to foreign selling.

As I understand it, Russia has sold all of its US$ holdings. I think China is in the middle somewhere in selling its US$ holdings. I think Saudi and other nations are also selling.

I think there is a group of some 27 nations moving to an alternate gold-back currency… outside of the SWIFT [Society for Worldwide Interbank Financial Telecommunication] system so it cannot be sanctioned, etc. As I understand it, the group has something like $67 trillion in assets. The group includes Switzerland.

– Margret

How are you positioned in Treasury bonds – if at all? Is the sector headed lower or higher in the coming days?

Send in your response – along with any other trading questions, stories, or suggestions – right here…