Buying stocks may seem crazy right now.
The stock market’s been falling hard all month. And the S&P 500 has sold off 5% in September alone.
To top it off, we’re heading into a month known for stock market crashes. The Bank Panic of 1907, the Crash of 1929, and Black Monday of 1987 all happened in October.
But, according to one of the market’s most consistent indicators, it’s almost time to buy.
I know, you’re probably rolling your eyes right now. But hear me out…
Look at this chart of the Volatility Index (VIX), along with its Bollinger Bands.
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.
On Tuesday, the VIX closed above its upper Bollinger Band. This will generate a broad stock market buy signal when it closes back inside the bands.
We’ve had three other buy signals so far in 2023. Here’s how the S&P 500 behaved following those signals:
In all three cases so far this year, the S&P 500 rallied immediately following the VIX buy signal.
The S&P 500 gained over 200 points in less than three weeks following the VIX buy signal in March. It popped 300 points higher in about three weeks in June. Even the signal in August (which we warned about here), was good for more than 100 points in two weeks.
We’re now in position for another VIX buy signal at any moment.
If the bounce follows the same script as the previous buy signals, then the S&P 500 could be trading sharply higher by Halloween.
There are no guarantees, of course. Just because previous VIX buy signals have worked out well doesn’t mean the next one will be profitable. Anything can happen.
But VIX buy signals have a consistent record of pinpointing stock market rallies.
So, despite the bearish action we’ve witnessed all month, it looks like the stock market is setting up for a decent short-term bounce. We’ll look for an appropriate time to trade it.
Best regards and good trading,
This article was originally published on this site