The Volatility Index (VIX) generated a new buy signal after the market closed on Tuesday.
But, much like the buy signal back in November, this is a low-confidence buy signal. So, I’m not buying it just yet.
Let me explain…
VIX buy signals occur when the VIX closes above its upper Bollinger Band (an extended condition which normally indicates extremely oversold conditions in the broad stock market), and then closes back inside the bands.
The VIX closed above its upper Bollinger Band on Monday (right red arrow). It closed back inside the bands on Tuesday – thereby generating the buy signal.
Take a look at the VIX chart…
But there are two problems…
The first problem is the S&P 500 gapped 80 points higher on the opening yesterday.
Traders who wanted to take advantage of the buy signal would’ve had to chase stock prices higher into that gap. That’s usually a bad idea since so much of the fuel for the new buy signal was spent on that opening blast higher.
The second problem is that most of the other technical indicators we follow weren’t all that oversold on Tuesday’s close.
For example, the McClellan Oscillators (NYMO and NAMO) closed Tuesday in a relatively neutral condition. And, following yesterday’s big stock market bounce, the oscillators are actually approaching overbought levels.
In other words, there’s not much energy left to fuel a sustainable rally from here.
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That was the same problem we had with the buy signal last November (left red arrow). And following a two-day-wonder rally, the stock market started to fall, and the VIX started to rise again – until it generated another buy signal a couple of weeks later (blue arrow).
I’m not bearish on the market. The choppy action we’ve seen over the past several weeks will likely come to an end soon.
And I agree with Market Minute analyst Imre Gams’ comments on Wednesday that the S&P 500 is forming a bottoming pattern. But it might take one more move lower in the market, and one more move higher in the VIX to complete that pattern.
So, just like we passed on the VIX buy signal last November, traders should consider passing on Tuesday’s buy signal as well.
But pay attention to the VIX chart… If it sets up another buy signal over the next two weeks, then that signal will likely prove to be a winner.
Best regards and good trading,
Jeff Clark
Reader Mailbag
In today’s mailbag, Jeff Clark Trader member Alex thanks Jeff on his recent recommendation…
I took your advice and sold my gold shares last week to take a small profit. I’m waiting for the price to pull back as you predicted. Your insight is always appreciated.
Thank you for your morning updates. They’re very informative and are always the first thing I read when I wake up. Keep up the good work.
– Alex C.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at feedback@jeffclarktrader.com.