It’s almost time to turn bearish on the stock market. As we approach the seasonally weak months of September and October, stocks are likely to get hit with selling pressure.
Before we get to that point, however, the market looks poised for one last hoorah – one more rally to new highs.
The Range for a Rally
You see, the Volatility Index (VIX) just generated a new buy signal.
Look at this chart of the VIX, along with its Bollinger Bands…
Bollinger Bands (the blue lines) indicate the most probable trading range for a stock or an index. Whenever a chart moves outside of its Bollinger Bands, it signals an “extreme” condition. In the case of the VIX, these extreme conditions trigger buy and sell signals for the broad stock market.
Sell signals occur whenever the VIX closes below its lower Bollinger Band and then closes back inside the bands. Buy signals occur when the VIX closes above its upper Bollinger Band and then closes back inside the bands.
On Monday, we got the sixth VIX buy signal of 2024 so far. Four of the five previous signals marked short-term lows in the market, and led to gains for traders who bought the S&P 500. The one signal that failed was in early April – when the VIX reversed a few days later and closed above its upper Bollinger Band again.
The buy signal that followed in mid-April, however, generated a 300-point gain in the S&P 500 in less than one month. We wrote about that signal here, advising readers of the potential for a big rally.
This current signal has similar potential.
Last week’s stock market decline relieved the overbought conditions on many of the technical indicators. Those indicators now have room to rally again, and perhaps help to push the S&P 500 to another all-time high.
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Of course, there are plenty of reasons to be cautious on the stock market for the intermediate term – valuations are extended, investor sentiment (a contrary indicator) is overwhelmingly bullish, speculative activity is at historic highs, and we’re heading into a seasonally weak period for the broad stock market.
For the short-term, though, VIX buy signals have an outstanding track record. Bears should let this one play out before attempting to add short exposure.
Bulls can step in and buy right here, in anticipation of the market making a new high. Just don’t overstay your welcome. September is coming.
Best regards and good trading,
Jeff Clark
Editor, Market Minute