The Volatility Index (VIX) is often called Wall Street’s fear gauge. It’s rare to get VIX sell signals.
We get VIX buy signals about four or five times each year.
But we haven’t had a VIX sell signal in two and half years.
Well, we just got one…
Look at this chart…
The VIX generates trading signals when it closes outside of its Bollinger Bands (BB – solid blue lines), and then closes back inside the bands.
The VIX closed below its lower Bollinger Band last Friday. It closed back inside the bands on Tuesday (red arrow). So, we have the first VIX sell signal since late November 2019. Before that, it was in August 2018.
Like I said, VIX sell signals are rare. And, they’re not all that bad… at first.
The two previous sell signals led to immediate (but shallow) declines.
In each case, the S&P 500 lost about 2% over the next week or so. That’s about 100 points on the S&P 500 in today’s environment.
Following those brief declines in late November 2019 and August of 2018, the S&P 500 bounced back and rallied to even higher levels. So, if we follow that road map, traders ought to be looking to buy if the S&P 500 dips back down into the 4350-4400 range.
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But (and this is a big but) …
Both of those previous VIX sell signals occurred about three months before the stock market was hit with a far more significant decline.
Traders might remember December 2018 – when the S&P 500 dropped 16%… and the start of the COVID pandemic, which inspired a 29% collapse in the stock market in March 2020.
Granted… we only have these two examples. And, it’s probably unwise to draw conclusions from such a small sample size.
But we ought to at least keep a cautious eye on the history of VIX sell signals.
The current signal may not prove all that bearish at first.
But if this signal turns out to be an early warning of a greater decline – like the last two signals turned out to be – then we may be looking at some downside fireworks as the calendar moves towards Independence Day.
Best regards and good trading,
Jeff Clark
Reader Mailbag
In today’s mailbag, Jeff Clark Trader member Ferdinand shares his experience with trading so far…
I’m from Manila, Philippines, a medical technologist by profession and totally new to stock trading. I’m skeptical about using a trading platform on my own.
To be honest, I had to watch the video three times before I finally decided to sign up. Well, I’m here now ready to dive and learn about the good stuff your company could offer.
– Ferdinand F.
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