We finally got our first VIX buy signal of the year.
We knew it was coming… The Volatility Index (VIX) closed above its upper Bollinger Band almost two weeks ago. All it needed to do was close back inside the bands, and it would generate a broad stock market buy signal.
It sure took its sweet time getting here…
But we got the buy signal after the stock market closed last Thursday – just in time for Friday’s bounce. And it looks like this buy signal has a lot farther to run.
Let’s take a look at the updated VIX chart, along with its Bollinger Bands…
Not only did the VIX hit its highest level in a year during the recent market decline, but the Bollinger Bands are the widest they’ve been in a year.
So, we’re due for some sort of action that causes the bands to narrow. That action is usually in the form of a falling VIX – which typically goes along with a rising stock market.
We had a similar setup in early December (left blue arrows). Back then, the S&P gained about 300 points over the next month.
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But most technical indicators are more oversold today than they were in early December. So, there’s a lot more energy to fuel an even stronger move.
It looks like we’re set up well for a sustainable rally that lasts for a few weeks.
I argued last Monday – as we entered the week with the S&P 500 trading near 4,400 – that traders should buy into any weakness. There were plenty of opportunities to do that as the index dipped as low as 4,222 before rebounding.
But now with a new buy signal in place, we may not get a chance to buy into weakness. Stocks could simply trend higher from here.
Nonetheless, buying stocks today is still a lot cheaper than buying stocks one month ago. The S&P 500 is trading today at its lowest level since last October.
We probably won’t be able to say that one month from now.
Best regards and good trading,
Jeff Clark
Reader Mailbag
Did you buy into the recent market weakness? If so, will you be buying in more before the market heads higher?
Let us know your thoughts – and any questions you have – at feedback@jeffclarktrader.com.