VIX Pattern Issued Buy Signal for Stocks – Will it Last?

The VIX has created a couple of never before seen patterns recently and it has been fascinating to see how stocks reacted. Before we talk about yesterday's sell signal (due to the inverse relationship between VIX and stocks, a sell signal for the VIX is an implied buy signal for stocks and vice versa), here are some of those historic oddities:

Stocks Dance to the Tune of the VIX

1) In mid-March, the VIX closed at 14.80, the lowest close since June 2007. This was significant for many reasons, one of them being that it closed below its lower Bollinger Band, which was the setup for a VIX buy signal.

The actual buy signal was triggered the next day. Unfortunately, there's no pure way to profit from a rallying VIX (I don't recommend VIX ETNs), but the March 13 ETF Profit Strategy update stated that:

"Being a contrarian after a rally like today is tough but often profitable. With the VIX near a 5-year low, aggressive investors may want to pick up some VIX calls." From low to high, the VIX rallied as much as 54%.

From Low to High

As the VIX rallied, the major stock indexes a la S&P (SNP: ^GSPC - News), Dow (DJI: ^DJI - News) and even the mighty Nasdaq (Nasdaq: ^IXIC - News) ran into trouble (and resistance). Seeing that stocks usually struggle with sub-15 VIX (NYSEArca: VXX - News) readings, that wasn't a surprise.

In addition, the S&P came within striking distance of the 1,425+ target range (S&P high was at 1,422), and the Nasdaq-100 nearly hit the 2,805 target outlined by the ETF Profit Strategy Newsletter on March 16.

2) During its 54% rally from March 16 – April 10, the VIX (Chicago Options: ^VIX) recorded 8 consecutive up days. That's the first time ever (at least based on the data I have). Such a historic streak was highly unusual and unlikely to last any longer.

The April 10 ETF Profit Strategy update referred to this rare event and other technical indicators and predicted that: "Some sort of bounce (for stocks) is in the cards."

Stocks bounced and the VIX declined, in fact the VIX closed below it's upper Bollinger Band on April 9 (the set up) and triggered a sell signal (for the VIX) yesterday. Based on the VIX sell signal and other factors, yesterday's ETF Profit Strategy updated considered the odds of higher prices today at 65%.

The chart below highlights the recent VIX signals.

Will it Last?

The key question now is whether stocks up trend has been broken for good. If it has been broken, this bounce will result in at least another leg down and much lower prices eventually. If it hasn't, stocks may rally to new highs.

With the S&P above trend line resistance and yesterday's VIX sell signal (buy signal for stocks) it's certainly not prudent to bet on lower prices. This however, could change quickly if the S&P falls below its crucially important trend line support.