The Volatility Index (VIX) spiked 10% higher yesterday. This looks like the start of a much bigger move.

We looked at the VIX last week and came away thinking there was the potential for a sharp, sudden rise in the index.

It took a few days longer than I expected it to. But, after yesterday’s spike, it looks like the VIX rally is underway.

Here’s an updated look at the 60-minute chart of the VIX…

The VIX moved lower last week while the MACD momentum indicator pressed higher. This sort of “positive divergence” on the MACD often signals the potential for a change in trend.

You can see how similar conditions earlier this month preceded a sharp and sudden spike higher in the VIX. The index rallied from about 11 all the way up over 16. A similar spike of 50% this time around could pop the VIX as high as 18 or so.

That’s the same target we get on the daily chart of the VIX. Take a look…

The drop in the VIX earlier this week completed the right shoulder of an inverted head and shoulders pattern. This is a potentially bullish pattern.

If the VIX can rally above the “neckline” of the pattern (the first red resistance line) at about 15, then that opens the door to a move towards 18 or so. That sort of a spike in volatility would almost certainly coincide with a sharp move lower in the stock market.

When the VIX spiked earlier this month, the S&P 500 lost 70 points in just a few days. A similar move this time could have the index trading back down to the 2840 level by the middle of next week.

Best regards and good trading,

Jeff Clark

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