Volatility came back from summer vacation yesterday. It’s well-rested and ready to get back to business.
And, that spells trouble for stocks in the short term.
The CBOE Volatility Index (VIX) spiked as high as 15.84 at one point yesterday. That was 36% higher than where the VIX closed on Wednesday. A last-hour rally in the broad stock market trimmed the gain in the VIX to “just” 22% by the closing bell.
But, that’s still enough of a move to declare that volatility is back. And, by the look of the following chart, it may stick around for a while…
For most of the past three months, the VIX has been stuck in a trading range between about 12 on the downside and 14 on the upside. The VIX closed yesterday right at the top of that range.
But, look at the momentum indicators at the bottom of the chart. Neither the MACD nor the RSI have moved into “overbought” territory. They’re still stuck in neutral. So, there’s plenty of energy remaining to fuel a stronger push higher in the VIX.
If the VIX can break out to the upside of its trading range, then the next resistance level is near 18. That sort of a move would likely require the S&P 500 breaking below the support of its 50-day moving average line at 2875 – which I showed you in yesterday’s essay.
This isn’t a bad thing. For several weeks I’ve argued that the market needs to move lower and create some oversold conditions among the technical indicators in order to set the stage for a year-end rally. Yesterday’s action may have been the start of that move.
Now, if the VIX can continue higher and close above its upper Bollinger Band (not shown on the chart) it will create the potential for a broad stock market buy signal when it closes back inside the bands. That will take at least a few days, and maybe a couple of weeks, to play out. But, it will set the market up nicely for a more sustainable, multi-week rally to close out the year.
First, though, we need to see more volatility. And, that means we need to see more of a stock market decline over the next few days.
Best regards and good trading,
Jeff Clark
Reader Mailbag
Yesterday, we asked if you thought the stock market has reached a tipping point.
In today’s mailbag, one reader lends his ideas on not only that, but the state of the world economy…
Do I believe the markets are somewhat manipulated? Only a fool would believe otherwise. What the pros are doing that does not appear on the ticker would give a clue. I remember when all trades were on the ticker with volume. Now, a lot is hidden. And at turning points, they sell what they can, not what they want. I would watch bets on market turns by pros. But, now I’m not privy to all that info, so I rely on Jeff for that. Add the fact we can all see the handwriting on the wall with debt, etc., but it is darn near impossible to call near the top or turning points. Technical works better than fundamentals for that.
We are in the middle of a deficit binge, on steroids. Deficits do matter. Many countries are buying tons of gold. China buys oil from Russia, pays in yuan, which is immediately convertible to gold. Other countries are setting up their own payment settlement systems to get around our settlement system. Our way of life may take a big hit in the near future… Unless they can find a way to extend and pretend further. But we have been in extend and pretend for some time now. There’s a lot coming to a head, but timing it? Impossible. Getting ready for it? Possible.
– Bernie
Also, a lifetime subscriber shares their trading experience and excitement to meet Jeff in Bermuda…
Jeff, I have been following your service for several years (since the Short Report days) and have a lifetime subscription. Thanks so much for the education and knowledge that you share with your readers! I am an executive in the financial services industry and have always followed the market and traded securities with limited success. Your training has given me the foundation to invest with confidence and humility to know that there are going to be some rough days.
I have done quite well with your suggestions and have made some trades on my own with limited success. Over the past year, I have been trading part time and able to generate over six figures in income and I am hopeful that I can trade full time one day.
I look forward to meeting you in person in Bermuda in a couple of weeks.
– Jim
To all the Delta Report readers who attended yesterday’s Q&A, we thank you. Expect more Open Lines with Jeff in the future… and a few surprises, too.
And as always, send in your trading questions, stories, or suggestions right here…