We briefly touched on the VIX in yesterday’s issue.
I said that it’s one of the most valuable indicators. It is like staring into a crystal ball for the stock market.
It measures the fear in the marketplace. When the VIX is rising, investors are scared. When the VIX is falling, investors are bullish.
I use it as a contrary indicator to identify reversal points at market extremes.
I wait for the VIX to generate a buy or sell signal.
Buy signal – VIX closes above its upper Bollinger Band and then closes back inside.
Sell signal – VIX closes below its lower Bollinger Band and then closes back inside.
Bollinger Bands measure the most probable trading range for a stock (or an index). When the price moves outside of its Bollinger Bands, it indicates an extreme condition.
Don’t worry if this sounds a little confusing. Let me show you a few examples.
Take a look at this chart:
The blue circles are “VIX buy signals.”