We’ve Got a Buy Signal

The Volatility Index (VIX) triggered a new buy signal when it closed back inside its Bollinger Bands earlier this week. We should see higher stock prices over the next several days.

Look at this chart of the VIX…

Bollinger Bands (the blue lines) indicate the most probable trading range for a stock or an index. Whenever a chart moves outside of its Bollinger Bands, it signals an “extreme” condition. In the case of the VIX, these extreme conditions trigger buy and sell signals for the broad stock market.

Sell signals occur whenever the VIX closes below its lower Bollinger Band and then closes back inside the bands. Buy signals occur when the VIX closes above its upper Bollinger Band and then closes back inside the bands.

Yesterday marked the fifth VIX buy signal of 2024 so far. All of the previous signals, however, occurred with the VIX trading at a relatively muted level – below 15. So, the rallies that we got from those buy signals were relatively muted as well.

This week’s signal, though, triggered with the VIX above 18. That’s an elevated level. So, we’re likely to get a larger move from this signal.

Indeed, this current signal looks most similar to the buy signal from last October.

That action marked a significant intermediate-term low for the stock market. The S&P 500 gained about 400 points in one month following that signal.

Of course, that doesn’t mean we’re going to see similar action this time around. But, the recent decline in the market has created extremely oversold conditions. And, it has knocked the S&P 500 about 100 points below its 50-day moving average line.

It seems reasonable that any oversold bounce that comes off of this VIX buy signal could push the S&P 500 back up towards the resistance of its 50-day MA.

That would generate an excellent short-term gain.

Best regards and good trading,

Jeff Clark
Editor, Market Minute