The Volatility Index (VIX) triggered a new “buy” signal when it closed back inside its Bollinger Bands last Friday. So, if stocks sell off today in reaction to the election results, aggressive traders should be looking to buy.
Here is the chart of the VIX, plotted along with its Bollinger Bands (blue lines) …
Long-time readers know that Bollinger Bands 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.
Friday’s action marked the eighth VIX buy signal of 2024 so far.
Here’s how the S&P 500 responded to those signals…
All of the previous signals produced immediate, short-term rallies. The only notable hiccup was in July – when the rally off of the buy signal ended quickly, and the S&P 500 sold off to a deeper low.
But, the buy signal in early August more than made up for the July decline. The S&P 500 gained 400 points in just two weeks.
Of course, this doesn’t guarantee we’ll see another rally in stocks as a result of the recent VIX buy signal. There are still plenty of reasons to be cautious.
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But, VIX buy signals have an outstanding track record. Traders have done well to follow them this year.
So, if we can gain a slight edge by buying into any election-related weakness in the market today, I suspect this recent buy signal will pay off in the days ahead.
Best regards and good trading,
Jeff Clark
Editor, Market Minute