The Volatility Index (VIX) has generated two trading signals over the past week.
We got a “sell” signal from the VIX last Wednesday. The market responded by dropping for four straight days. The S&P 500 lost almost 50 points.
Then, yesterday the VIX triggered a buy signal…
The VIX closed above its upper Bollinger Band on Monday. It closed back inside the bands yesterday. So… that’s a “buy.”
It’s rare for the VIX to trigger a buy signal so soon after flashing a “sell” signal. But that’s what can happen when the Bollinger Bands pinch together as they did last week. That condition can sometimes lead to false signals. And, I suspect that’s what we have with this new buy signal.
Let me explain…
Here’s an updated chart of the VIX…
The last time the Bollinger Bands were pinched as tightly together as they were last week was back in January. That was just before the VIX generated three buy signals in about two weeks.
The first buy signal was legitimate. It happened following a brief decline in the market and a quick spike higher in the VIX. The S&P 500 rallied about 70 points in five days.
The second buy signal triggered soon after the market broke down from a parabolic rally. Traders will remember the violent move higher in stocks at the end of January. They’ll also remember the sudden decline.
I cautioned readers at the time that the second VIX buy signal of 2018 may be short-lived. The market looked like it still had more work to do to the downside. Despite the VIX buy signal, most of the other technical indicators were not yet oversold and the technical picture of the S&P 500 chart argued for more of a decline.
That’s similar to the conditions we have today.
Yes… the VIX has generated a buy signal. But most of the other technical indicators are in neutral. They’re not oversold enough to support a strong rally attempt. And the chart of the S&P looks like it’s breaking down from a bearish rising wedge pattern – and there’s a lot more work for it to do to the downside.
So, this new VIX buy signal may turn out to be false. If so, the market should resume its decline right away. And we’ll get a better setup for a more significant buy signal once the decline phase runs its course.
Best regards and good trading,
Jeff Clark
P.S. There’s a good reason I’ve been keeping a close eye on volatility lately…
Simply put, periods of high volatility are where I make the most money. It’s how I was able to build my money management firm, retire early, and spend my days with my family.
And right now, I believe we’re about to experience a major shift in the markets… one that smart traders can use to make 10 times more money than usual. Details here.
Reader Mailbag
Today, more feedback from Delta Report subscribers on a recent winner…
Jeff, thanks for your 68% return in just 4 trading days on SPY puts, courtesy of Delta Report. I profited $1,620 off $2,400 in puts I bought for both profit. I’ve made quite a bit extra cash the last few months off SPY options from you advising us of the market’s technical conditions and signals. Stay two steps ahead of the crowd to buy low, sell high.
– Tim
Thanks, Jeff, for an accurate SPY analysis that netted me $1,200 in a few days. Waiting now for the next SPY recommendation. Keep sending the spot-on recommendations.
– Bill
Hi Jeff. I like the idea of taking a profit here in the SPY position. Your discipline appears to be rubbing off on me. I knew an old trader who told me once, “You are never wrong taking a profit.” I remember many years ago trading the S&P and getting my clock cleaned on occasions by not being protective with my profits. Your service is a huge part of my retirement income. Thank you for your great teaching method.
– Dave
And readers respond to yesterday’s essay, “‘I’m Benito’”…
Thank you so much for sharing this wonderful story. My grandparents also emigrated to Misiones, Argentina where most of my family still lives. What a good reminder that there is so much more than the danged markets day in and day out!
– Ellen
God bless you Jeff for taking Benny back home. What joy for him and how special for your sons to be able to see and experience that. You, my friend, know what life is about.
– Vic
Thank you for sharing this absolutely wonderful experience! What a joy it was to read it several times. I felt the heat of the sun and the hugs of the friendships!
– Karin
Hi Jeff. Many thanks for your loving account of your family visit in Italy. Touching story and as a family guy myself, one of great importance. Your DeltaReport and MarketMinute are hugely valuable as well. Thank for your hard work on our behalf.
– Gregory
Jeff, thank you so much for telling everyone about your trip with family and father-in-law to his hometown. So moving and touching, and really giving perspective when it comes to worrying about market machinations on a daily basis.
– Stephen
Thank you, as always, for your kind and thoughtful feedback. Keep it coming – along with any trading questions or comments – right here.