Taking another stab at VIX’s daily chart. Yesterday’s low of 17.09 was just .03 off the .786 Fib level of 17.12 we mentioned a couple of days ago [see: The VIX is In].
There are a couple of different interpretations. Fist: that the smaller (red) pattern is complete at the .886 and should reverse strongly. Second: that yesterday’s low is just a Point B in a larger pattern such as a Crab. Third, That we should be looking at the larger scale pattern — which calls for a Point B reversal at the .786 of 16.67. So, which is it?
As expected, the Fed threatened much but did little – extending Twist through the end of the year. Stocks and commodities didn’t much like it; the dollar is up nicely.
If the sell-off holds or accelerates at all, it will confirm the Point B we placed at 1363.46 yesterday — the Fib .618 retracement of the 1422-1266 drop. It might also confirm my suspicion that the daily RSI pop out of the channel was an aberration rather than a broadening of the channel, as seen in the following chart. I keep coming back to the RSI chart below because of its import.
A drop back into the channel to, say, the midline would probably result in a SPX pullback (Point C) to the channel line around 1340. A drop to the other side of the channel would likely result in a drop to the other side of the price channel — say 1326.
Even if we were to call the channel broken, we’d still be looking at a very extended rising wedge in RSI — also a sign of an overbought situation.
If 1363 holds as our Point B, it leaves the door open for a Gartley, which completes at the .618 (1389), or a Bat, which completes at the .886 (1404). Either of these, especially if they come on the heels of a more significant dip now, would likely fit nicely with a VIX drop into the low teens, possibly below the 13.66 watermark.
Note the smaller scale patterns all had their most common targets exceeded during yesterday’s rumor infused ramp job. So, the possibility remains that the ramp just continues on up this acceleration channel, straight to our upside targets before turning back down. That’s certainly what I would have expected had QE3 been announced. But, I don’t think so.
I think it’s more likely we get one of the paths below.
While I’ve been typing this, SPX has recovered to almost even. In fact, it stopped right at the .886 of yesterday’s highs, seen here on the 5-min chart. BB’s upcoming appearance will be important. The lack of a serious sell-off after the announcement should embolden them to leave well enough alone — which might be enough to get a little more downside going.
I’m going to be traveling over the balance of the week, so posts will be a little spottier than usual. I know I’ve received many questions and comments in the time it took to put this post together, and I’ll try to answer those after I get to LA this evening.
Stay tuned.
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I got stopped out of my shorts in the first few minutes this morning. Apparently we’re going to test the .618 retracement instead of the .500 before any serious back test occurs. There’s one .618 at 1358.56 (from 1415) and another at 1362.93 (from 1422.) I’ll take a fresh look at re-shorting there, though this is a pretty powerful push.
Earlier today [see: Close but no Cigarro], I opined as to how SPX wasn’t done back testing its IH&S because — among other reasons — VIX hadn’t even reached, let alone reacted off our target of 18.31 (the solid red line.)
Never mind the “reached” part. VIX nailed our June 12 forecast right at the close. I don’t know about you, but I get all tingly inside when a 22% move comes in right on target like that.
We’ve hit three bulls eyes in a row with VIX — including the interim top on April 10 [see: Bottom Fishing], calling the June 4 high of 27.12 back on April 18 [see: VIX at a Crossroads] and, now this. The fourth will be a little trickier.
Well, the Greek election came and went and, oddly enough, the world is still turning, the price of gas is still too high and (sadly) Mrs Eastwood & Co is still on the boob tube. The election result was in the middle range of possible outcomes and, as such, has satisfied neither the bulls nor the bears.
Friday’s initial follow-through after the IH&S completion only slightly exceeded our June 1 forecast target, and this morning’s dip came very close to our downside target [see: Mixed Signals.] These were adjusted this past Friday to 1342 on the upside and 1334 on the downside, as seen from this chart posted Friday morning:
So, did this morning’s dip to 1334.46 complete the IHS back test? Mind you, I don’t object to immediate gratification; but, I think not.
Back on June 1, I drew the following forecast, but was so uncertain about it I didn’t post it until June 11 [see: Mixed Signals.]
On the 11th, I adjusted the timing a bit, but then basically set it aside. Other than helping me forecast a dip to 1303-1308 (which occurred a few hours later) I expected it was just a little too “cute.” In other words, it seemed a bit too obvious for it to play out.
Well, here we are — just a couple of points away. Despite my best efforts to disown it, the forecast is proving correct…and, right on schedule.
I don’t recall making any deals with an otherworldly spirit or otherwise pledging my soul in exchange for eerily accurate forecasts. No, I think there’s something much more sinister at work here.
With tomorrow being OPEX Friday and the important Greek vote this weekend, the market is in wait and see mode already. But, we’re on Head & Shoulder watch, meaning the little games that market makers play just prior to options expiration might be a little more predictable. If you’ll indulge me, we’ll try a little real-time experiment this morning.
We have a small scale H&S setting up in the right shoulder of a larger scale Inverse H&S. The smaller pattern targets 1280 while the larger one targets 1403. With those kinds of moves at stake, speculators will jump on board any seemingly significant trend.
June 13, 2012 — 60-min EOD
Market makers, who rake in a lot of their money writing calls and puts to said speculators, have a vested interest (read: house in the Hamptons) in seeing the market go nowhere (unless they’re sadly underwater.) But, with no volatility at all, speculators would look elsewhere for action.
So, MM’s engineer moves that look like a break out or break down and write options to suckers speculators who — seeing the move they’ve been hoping for — jump on board. They’ll let it run a little while, just to make sure they have everyone on board, then let the air out and run the game in the other direction.
It’s been going on for the past week, and yesterday it indicated further downside when the latest RSI fan line was broken. Having been long since the last turn at 1307, I played along and went short at 1317.
I was no doubt one of many who believed the little H&S might either complete or come close to it around the 1304 level. Personally, I was hoping for a quick 20+ point round trip (10+ each way.)
9:36 AM
This morning’s opening was mixed, but what initially looked like a back test to a perfectly good decline quickly developed into something more when the back test turned into a fan line violation to the upside.
9:59 AM
I took two points of lumps and got long again. Sure enough, SPX has started a nice little run to the upside.
10:24 AM
Now, as we approach the purple channel line on RSI and the previous high on the price chart, the upside target becomes a little more clear — probably a little over 1325. A 10-pt gain should be enough to get bulls salivating over the H&S (the one with the 1403 target) completing.
The way this usually works, the move should fizzle and prices slowly settle back. Call buyers won’t know what to make of it, but many will hang on — maybe even double down as the excitement fades and bears begin to wake up.
It’s not unusual to see several false breakouts and breakdowns during this period — just so everyone has the opportunity to contribute to the Hamptons summer house fund. For nimble traders, lots of opportunities to scalp a few points on the churn.
Stay tuned.
UPDATE: 12:55 PM
One of the no-so-fun quirks of WordPress versus the old site’s Blogger is that I’m occasionally logged off for no good reason, without warning. I might have been logged in all night, with no activity whatever. But, right in the middle of writing a new post WordPress can kick me off.
It means, say, if I hit the “publish” button and run off to get my daughter to camp on time, I might come back to a page asking me to log in. Fortunately, the post wasn’t lost. But, it also didn’t get posted when intended. My apologies.
12:58 PM
SPX slightly exceed our 1325 target, hitting 1326.66 just a few minutes ago. I’m going to go ahead and take profits here and see if we don’t get a return trip back down. If we break through the red dashed TL, I’ll jump back in for a trip to 1335 — but with tight trailing stops.
If you’re wondering where this is all going, my inclination at this point is to go into the weekend in cash. While the outcome of the Greek election is fairly predictable, I don’t like the idea of twisting in the wind while the investing public decides whether it’s good news or bad.
UPDATE: 3:08 PM
No interest in playing these whisper rumors. I’d be really surprised if it holds. Staying in cash — probably through the weekend at this point.
As Reeodd pointed out yesterday, there is a potential H&S setting up on the 60-min chart. I’ve been a little leery of it, as its completion would certainly alter the timing of the forecast currently in place. It’s highlighted below, and it targets somewhere around 1280.
As we saw with the last major H&S top at 1422, when H&S patterns don’t complete, it’s sometimes with a bounce just above the neckline, rather than going through the neckline and playing out. Here, a bounce at the neckline is what would keep us on track with our current forecast. But, it’s not at all assured.
Today’s shaping up as planned. We’ve had a nice 10-pt move after tagging our downside target range of 1303-1308 yesterday and again this morning [see: Mixed Signals.] After fading yesterday’s opening at 1335, that represented a nice daily gain of 2.1%.
SPX has pushed up against its 60-min RSI channel and is showing signs of wanting to push through. Recall that our upside target for the next few days is 1342-1343. The ideal timing would be OPEX Friday, but don’t be surprised if we bounce around a bit and don’t arrive till Monday.
