Last week’s spike in the VIX triggered a buy signal because it occurred within an uptrend, says Ari Wald, Technical Analyst at Oppenheimer.
Wald defines a VIX spike as a reading that is 50% higher than its 3-month low and the occurrence of such VIX spikes usually signal a short-term market low. He says this is particularly the case when they occur during an uptrend, which Wald defines as when the S&P 500 is above its 200-day moving average.
Wald points out that since 1990, the S&P 500 has averaged an 8.4% gain in the following six months when this signal is triggered as opposed to only a 4.2% gain for any six month period (see Chart).
As confirmation, he is now on the lookout for a day in which losses at the open are reversed into the close, another signal that selling has been exhausted.