If volatility picks up next year, as I expect it to, then we’re going to get a lot more buy and sell signals from the Volatility Index (VIX).
The Volatility Index (VIX) is commonly referred to as Wall Street's fear gauge. The VIX rises as investors grow fearful. It falls when investors are complacent.
Extreme moves in the VIX are excellent contrary indicators. As traders, we look to buy stocks when the VIX makes an extreme move to the upside, and we look to sell stocks when the VIX makes an extreme move lower.
Take a look at this chart of the VIX plotted along with its Bollinger Bands…
Bollinger Bands measure the most probable trading range for a stock or an index. Whenever a chart moves outside of its Bollinger Bands, it indicates an extreme condition – either extremely overbought or extremely oversold. Since the VIX is a contrary indicator, it's best to buy stocks when the VIX is extremely overbought. It's best to sell stocks when the VIX is extremely oversold.
The blue circles on the chart show when the VIX traded above its upper Bollinger Band and then fell back below it. Those are broad stock market buy signals.
When the VIX falls below its lower Bollinger Band and then closes back above it, the VIX generates sell signals. Normally I would use red circles to show when that happened on the chart. But in 2017, the VIX never generated a sell signal.
That’s just another remarkable indication of the low level of volatility in the market last year.
Keep in mind, though – low levels of volatility are always followed by higher levels of volatility. That’s why I suspect we’ll have lots of opportunities to profit off of wild movements in the VIX in 2018.
As with the 9-day EMA, we could use the VIX buy and sell signals to set up quick trades in an S&P 500 ETF, or one of the leveraged ETFs. But the signals also provide good setups for the intermediate-term trades I recommend in the Delta Report.
You see, VIX buy and sell signals typically last a few weeks. So, we can use VIX signals to position for slightly longer-term trades.
For example, the VIX buy signal in mid-April helped provide the setup for a call option trade I recommended on Qualcomm (QCOM) which produced a 94% gain in just over two weeks.
The buy signal in August set the stage for an uncovered put trade on Macy’s (M) which ended in a 28% gain about four weeks later.
And the action that produced the mid-November buy signal encouraged me to recommend that subscribers take profits on an S&P 500 ETF put trade (42% in six days) rather than risk holding the position in an oversold market (the options would have gone on to expire worthless).
As I mentioned… there weren’t many chances to profit off of VIX buy and sell signals in 2017.
But if volatility picks up this year – even just a little bit – then we should have plenty of profitable opportunities.
Best regards and good trading,
Jeff Clark
P.S. Traders who watch the VIX in 2018 should have a profitable year. But that’s just one simple way to take advantage of the market swings I see coming…
My Delta Report subscribers will do even better in the months ahead – all thanks to the secret technique I developed back in 2000, near the peak of the dot-com bubble.
To learn more about the Delta Report… and how it can help you best the market in 2018… click here.
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What trading strategies are you looking forward to using in the new year? Will you be watching the VIX as closely as Jeff?
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