Welcome back, volatility. We missed you.

Stocks had a crazy day yesterday. The S&P 500 gapped 20 points higher – to a new high above 2807. Then it reversed and sold off nearly 40 points. The index bounced back a bit in the final hour to close down “just” nine points at 2776.

We haven’t seen this sort of action in well over a year. And I expect we’ll see plenty more of it in 2018.

The Volatility Index (VIX) closed at 11.66 yesterday. That’s up 27% so far this year – making the VIX the top-performing index in the market so far in 2018.

So, it appears the prediction we made back on January 1 – that we’d get a lot more buy and sell signals from the VIX this year – is likely to come true. In fact, we’re on the cusp of a VIX buy signal right now.

Take a look at this chart…

VIX buy signals occur when the index closes above its upper Bollinger Band and then closes back inside the bands. The blue circles on the chart show the seven buy signals that triggered in 2017.

Here’s how the S&P 500 performed following each of those signals…

In every case, the VIX buy signal occurred at or near at least a short-term bottom for the S&P 500.

The most interesting thing about the signals in 2017, though, is it did not take a large selloff in the stock market in order to create the conditions for a VIX buy signal. The VIX closed above its upper Bollinger Band after just small declines in the market.

That’s likely to be the case if the VIX generates a new buy signal over the next few days. The VIX closed above its upper Bollinger Band yesterday – after just a nine-point decline in the S&P 500. When the VIX comes back inside the bands, it will trigger the first buy signal of 2018.

Of course, stocks could sell off hard today and/or tomorrow and force the VIX even higher before it comes back inside the bands. I’d prefer to see a selloff that at least gets the S&P down to test its 9-day exponential moving average at about the 2752 level. But, given the current extended condition of the VIX, we’re not likely to see a deeper selloff than that before the index generates a new buy signal.

And given the persistent profitability of the past seven buy signals… traders should probably just hold their nose and buy when the next one triggers.

Best regards and good trading,

Jeff Clark

P.S. In my weekly option trading service, the Delta Report, we look for signals – just like what we’re seeing today – to place low-risk, high-upside trades.

For example, we closed out a 155% gain just yesterday. And the trade hitting inboxes today has the potential to rise over 100% in the coming weeks.

To learn more about the Delta Report and my approach to trading today’s market, click here.

Reader Mailbag

In today’s mailbag, a kind note from a Delta Report reader…

I just want to say that I appreciate your fine mix of teaching, candor and courtesy.

– Terry C.

And a different take on gold and the dollar’s inverse relationship…

Gold and the dollar are manipulated, as you know. So I can’t get too excited about dollar down and gold up.

– Charles S.

As always, feel free to send in your trading stories, questions and suggestions right here.