The Volatility Index (VIX) just generated a new stock market buy signal.
This is the fourth buy signal of 2022. And if this one plays out like the previous three, then stocks should be higher in the weeks ahead.
Take a look at this chart of the VIX along with its Bollinger Bands…
Bollinger Bands illustrate the most likely trading range for a stock or an index.
Whenever the VIX trades outside of its Bollinger Bands, it indicates an extreme condition that’s likely to reverse. And those reversals create trading opportunities.
The VIX generates a stock market buy signal when it first closes above its upper Bollinger Band, and then closes back inside the bands.
That’s happened three previous times this year (blue arrows). Each time led to sharp, oversold bounces in the stock market.
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For example, the buy signal in January kicked off a one-week, 270-point rally in the S&P 500. The index rallied 10% in about three weeks following the early March buy signal.
And in early May – just before the Federal Open Market Committee (FOMC) meeting – the VIX triggered another buy signal, which sparked another 270-point bounce in the S&P 500.
Of course, there’s no guarantee that this week’s buy signal will lead to similar results.
But most technical conditions are extremely oversold. And investor sentiment (a contrary indicator) is about as bearish as it’s been in many years.
So, it looks like the stock market is at least set up for a strong oversold bounce – if not a more sustainable multi-week rally.
For traders who were willing to “buy the dip,” these previous buy signals worked out well.
And it’s likely the current buy signal will work out as well.
Best regards and good trading,
Jeff Clark
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