Why I’m Not Trading the New Buy Signal Yet

The Volatility Index (VIX) generated a new buy signal after the market closed on Friday.

But this is a low confidence buy signal. So, I’m not buying it… yet.

Let me explain…

VIX buy signals occur when the Volatility Index closes above its upper Bollinger Band (an extended condition which normally indicates extremely oversold conditions in the broad stock market), and then closes back inside the bands.

The VIX closed above its upper Bollinger Band last Thursday.

It closed back inside the bands on Friday, thereby generating the buy signal.

Here’s the chart…

But, there are two problems…

The first problem is the S&P 500 blasted 75 points higher on the Friday. And, the VIX fell 14%.

Much of the potential for a market rally has already occurred just generating a buy signal. Indeed, the VIX closed Friday closer to its lower Bollinger Band than to its upper band.

The second problem is that most of the other technical indicators we follow aren’t all that oversold anymore. The McClellan Oscillators (NYMO and NAMO), for example, closed Friday in a relatively neutral condition.

In other words, there’s not much energy left to fuel a sustainable rally from here.

That doesn’t mean the market can’t press a bit higher. It just means that this signal is not going to lead to the sort of strong, multi-week rally we saw from the buy signal back in March.

Instead, any bounce we get from the current buy signal will likely burn out within a few days.

Traders should consider passing on Friday’s VIX buy signal as well.

But pay attention to the VIX chart in the days ahead. If the broad stock market pulls back, and the VIX rallies to set up another buy signal over the next two weeks or so, then that signal will likely prove to be a winner.

Best regards and good trading,

Jeff Clark

Is the VIX an indicator you use often in your trading?

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