The “Fear Gauge” Just Flashed a New Warning Sign

Jan 18, 2023

The “fear gauge” is flashing a new warning sign.

In fact, at less than 20, the fear-indicating Volatility Index (VIX) is telling us all is calm.  

But don’t get caught off guard. 

Anything less than 20 on the VIX is actually a sign of complacency, which can raise the risk of investors getting caught off guard, which can exacerbate fear in the market. 

And we all know what happens when the herd gets fearful.

If you pull up a two-year chart of the VIX, you can see that every time the fear gauge drops to 20 or below, it pops again shortly after.  When that happens, markets get rattled, and every one runs to the exits. However, it’s not just a drop to 20 that concerns us.

In addition to the 20-line, keep an eye on RSI, Full Stochastics, and Williams’ %R.

When RSI dips to its 30-line, when Full Stochastics dips to or below its 20-line, and when Williams’ %R dips to or below its 80-line, the VIX takes off shortly after. In fact, you can clearly see it happen again and again since the middle of 2020.  

Unfortunately, not only is the VIX below 20 at the moment, RSI, Fast Stochastics, and W%R are all in oversold territory.  That tells us to be cautious of the calm.

It’s a great way to determine where disaster may strike.

We can also use the same indicators to figure out when to go long the market, too. In fact, when things get way out of hand, we can spot where the fear gauge will reverse. Now, when RSI peaks at its 70-line, when Fast Stochastics peaks at 80, and when Williams’ %R crosses its 20-line, that’s where fear begins to cool.  Look at a two-year chart, and you can see it.

No one ever said trading was easy.

But with the right tools, you have the potential to do very well.

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