Traders are getting complacent again.

The Volatility Index (VIX) – Wall Street’s measure of fear and complacency – closed yesterday near its lowest level of the past six months.

That’s a sign that investors are comfortable with the stock market right here. They’re not worried about a possible selloff in stocks. They’re not paying up for insurance to protect their portfolios.

But they should be.

Regular readers know I expect volatility to press higher. About a month ago, I warned traders, “Don’t Give Up on Volatility.” Last week I wrote, “It’s Going to Be a Volatile Summer.”

So far though, nothing has happened. The VIX has drifted lower as the stock market has pressed higher.

But it doesn’t hurt to be on the lookout for increased volatility – especially as we head into the seasonally weak months of August and September. And with the VIX back down to where it’s bottomed several times over the past few months, a little bit of caution could prove to be a good thing.

Take a look at this 60-minute chart of the VIX…

Regular readers will recognize this pattern as a “bullish falling wedge” with positive divergence on the MACD and RSI momentum indicators. Most of the time, this pattern breaks out to the upside.

Since this is a 60-minute chart, this pattern should play out within the next two or three days. And, if the VIX does break higher, then look for it to challenge the 14 level by Friday.

This setup confirms the potential bullish look of the daily chart of the VIX I showed you last week. Here’s an updated look at that chart…

After breaking out from a bullish falling wedge pattern at the end of June, the VIX has drifted back down and is now testing the former resistance line of the wedge as support.

Given the bullish look of the 60-minute chart above, I expect support will hold on the daily chart. The VIX should bounce higher. And that bounce should coincide with a decline in the broad stock market.

At the very least, this current setup in the VIX – which shows a high level of complacency among traders – should keep a lid on the stock market. There’s probably not a whole lot of upside remaining in the current rally phase. And based on the look of these VIX charts, we might get a fairly decent decline over the next few days.

Best regards and good trading,

Jeff Clark

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