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The stock market blasted higher last week.
The S&P 500 gained 2%—its best performance in quite some time. The index is now in positive territory for the month. And I expect the gains to continue.
For most of the past two weeks, the market action has been constructive for the bulls. The S&P 500 has been making higher lows and higher highs—which indicates bullish momentum. And, so far at least, the technical indicators have avoided reaching into overbought territory. So, there’s still enough fuel to power the market even higher.
But, as a trader, I’m always on the lookout for conditions that might cause a change in the forecast. It’s like a sailor looking for storm clouds on the horizon.
The seas are relatively calm right now. The skies are clear. It should be smooth sailing ahead for the bulls in the short term.
But there is a small patch of turbulent air just a few nautical miles ahead. It’s nothing right now. And it may never amount to anything later on. But traders should keep an eye on it just in case.
The VIX is commonly referred to as Wall Street’s “fear gauge.” It rises as investors grow fearful. It falls when investors are complacent.
Extreme moves in the VIX are excellent contrary indicators. As traders, we look to buy stocks when the VIX makes an extreme move to the upside, and we look to sell stocks when the VIX makes an extreme move lower.
Bollinger Bands measure the most probable trading range for a stock or an index. Whenever a chart moves outside of its Bollinger Bands, it indicates an extreme condition—either extremely overbought or extremely oversold.
Since the VIX is a contrary indicator, it’s best to buy stocks when the VIX is extremely overbought and to sell stocks when the VIX is extremely oversold.
Right now, the VIX is still within its Bollinger Bands. We don’t have any sort of extreme condition of which to take note.
But the VIX is approaching its lower Bollinger Band. If the stock market rallies early this week, then the VIX is likely to decline. And it won’t take much of a decline to push the VIX below its lower Bollinger Band and set up the possibility of a broad stock market sell signal when the VIX comes back within the bands.
For now, the skies are clear and the sea is relatively calm. But keep an eye on this chart of the VIX. It will tell you if a storm is on its way.