Market Observations - VIX kisses

VIX kissed the trendline...as expected. Now I am waiting for the reversal - should be quit a show.

The corporate bonds chart below needs no lables...Clearly the market rally is diverging with the smart money in bonds...we need to watch these bonds early next week.

My scenario seems to be coming together nicely...Dow pushed out a minor high extension and maybe we can get a little more from the SPX...but otherwise the market is most likely nearly done.

Market Observations - Fake Out Shake Out

Nice consolidation day after two days of short squeeze...so, what's next? Well, since most people are focused on how high this move will go...I suggest we look a little deeper.

Upside targets are so close here that we can almost spit on them (pardon the vernacular). Gold 1085, Silver 18, SP500 1085 to 1100, Dow 10,100. This up move has been a torture I know. I have learned a lot about how insane people can be in chasing things...how extreme government and special interest meddling can be...how whacked the concept of herding really is once it has started. Now it is nearly complete. And we will likely have good excuses for some sort of emotional reaction. Ok, Alcoa reported better than expected earnings. And the Initial Claims numbers + Wholesale Inventories might be just the ticket. However, from my perspective upside is the one spike reaction that is left...most likely occurring sometime between tomorrow and tuesday.

Why do I think this? Well, first its the posture of the VIX. A spike high will bring the VIX back to testing its down trend line and horizontal support. These will likely formidable support. Oil. Oil has vastly underperformed my expectations so far...it should have been able to break out of its pattern. I can not rule out a breakout...but so far...the action in oil is much too divergent from Gold, Silver and the Dollar to write off. The Russell 2000 index is substantially lagging the SPX...given the energy components and financials are the largest group in the index...this is a revealing condition. Distribution days are abundant on all equity indexes with uptrend lines directly above. Additionally, pullbacks recently have been getting larger at 39, 47 and 60 points. So, big cracks are showing. Then there's the Dollar itself. Supposedly, the dollar is dead, gone, buried...but it won't die. I think my alternate scenario will come to pass here as I indicated recently. A spike in inflation assets will be combined with a spike lower in the dollar...possibly into the 74.50's or 75's - but it does not have to go that far. Best would be to take out recent lows. Overall the chart of the dollar is looking pretty complete.

Again, I want to underline that the key to the market is the dollar. I have been working on several pieces chronicling China and JP Morgan. We should expect a currency move to drive the markets. China, is on life support - despite what the popular belief is. Not to mention Japan. A stress from an Asian financial system is something coming out of left field for most people...especially Peter Schiff or Marc Faber...but that is exactly what we are most likely going to get.

In any case, what I am looking for are elements that cause conditions for a swift reversal. A quick up/down reversal may not occur...and the market may want to drag this thing out...but I think everyone is too worn out for that...we should be watching for a reversal to occur just when everyone is analyzing targets for the up move.

If a quick reversal does not occur...fine - no damage done. But I think that it is appropriate to treat any spikes as high risk reversal possibilities...and err on the side of downside bets in those cases. If you ask, at this point, what people are expecting - I would think bears are looking for more torture and bulls are looking for continued upside. The only thing both camps are not looking for is a bullish move up and a bearish move down in the same time window. But that's what I am looking for.

What's Next?

Well that was interesting finally. The market has spoken decisively, by breaking major months long supports. So, what's next. Well, I am happy to tell you that the alternate scenario for the dollar has not played out. That does not mean it is entirely eliminated. It is possible that off the current market support levels, we get a forceful rally and possibly a retest for some kind. But let me preface by saying, that is NOT what I am looking for. The market was clearly overcome buy lack of uncommitted dollars being available to fund new equity purchases. Investors have no more money left, they are all in. The dollar chart says it all. Assets are being liquidated to pay credits.

Over the last six months, this rally has been funded first by short covering and bail out funds supplied to banks. (invested in call options they bought from scared pension funds and retirees). The problem is now the FDIC, deficit and pressure on the Fed is making fiat liquidity scarce. The Fed knows it can not take the risks it is used to being able to take. As the pressure on the fed, and against their 90 year campaign to short the dollar, increases...it will be visible as the shortage of available cash dollars as increasing prices in the chart below. The fact is, the system has come to a grinding halt. The Fed can't print the way they were used to, they can not lie about their balance sheet investments like that have done because Ron Paul, a large amount of americans and 280 congressmen are breathing down their throats.

I am looking for a dollar break over the red line on the chart below to signal the next round of deflation is in full throttle. It certainly is galloping along, but could hide for a little longer if the powers that be or markets wanted to look past it. Over that red line around 78.39...irrevocably declares a trend change in the dollar and likely the beginning of the end of Fed's campaign to destroy it.

All action in the market will be guided by the dollar in my opinion. The upper trendline is my immediate target and could be met tomorrow or monday if the market wants to do it. Given the action in the VIX and the dollar, I would look for a pullback consolidation in the two and then a resumption of the upward move. If the dollar can break cleanly through that upper trend line without pullback or consolidation...then the severity of the situation in the markets will likely intensify very quickly. I think that this is a significant possibility. But, more likely I would look for a good size rally for a larger corrective bounce after the dollar reaches resistance.

Dollar - Hanging on the Edge

The dollar is hanging on to the declining wedge. It has not rallied impulsively. It needs to bounce hard tomorrow, otherwise, it looks potentially like it will attempt to match the 100% target for wave 5 down. This is around the 74 to 74.20 area and would coordinate well with a push in early October till the 7 to 9th. However, the reason that I suggested that the dollar configuration could be consolidative is there are multiple elements that are not pointing to a substantial rally in the markets here. The VIX is one of them. The VIX was up solidly as was the Put/Call. The positive VIX indicates a trend emerging to me, and the put/call may indicate a reaction in the market of a little more upside. I would not prefer to see the dollar fullfill the pattern below. But, the structure for Gold and Gold related stocks and Oil point to higher prices unless we get immediate or very quick reversals. The VIX supports the potential reversal scenario.

So, given the put/call and the $VIX setup, perhaps we are looking at a finishing move up in the am for the transports and indexes and then as sharp reversal. I will be buying into the reversal scenario if VIX takes out the recent highs.

Market observations - Back Test Time

I would like to reiterate that there are gaps on the ES that need to fill in the 1074 area...In my opinion we have to test that area or exceed it. It is entirely possible that the market fails to make a new high and instead confirms wave 2 for our impulse wave down. This could be fulfilled with a move to the 1077 area on the SPX cash.

As you can see the VIX has made another attempt to break its down trendline. This is accompanied by a MACD cross and RSI over 50...something to keep a close eye on...VIX is currently only backtesting this trendline...it could drop below it again...or preferably consolidate and rally straight from here.

Transports had their huge sell day last week...the largest volume selling day in the $TRAN history. If the markets do continue up...into the Oct 2 to 7th area...any new high will not likely be confirmed by the $TRAN. This is a very good cue that these highs will be a top of consequence.

Oil is at an important support...and with the dollar showing strength today...it could easily break the down-trend line and take a quick trip to 57. The alternate view is that the dollar needs a consolidation and will allow for some upside for Oil - though that should not amount to much.

Agriculture commodities are struggling and remain below the emerging 2-4 line of the pattern...a break of that huge support line below will likely coincide with a strong move down. Upside looks like it would be quite limited...and this chart does not look healthy at all.

The dow could get its legs, in fact it has to tomorrow...otherwise this whole pattern, VIX, Trans and DJ look like simple backtests of resistance. Personally, I think there is some remaining upside...though nothing substantial.

Market Observations - Optimism and Fear

Below, I show a chart of the Russell 2000. This index has broken over the top its upper trend line in what looks like a parabolic throw over. At the same time VIX closed positive and has failed to close below support...this is a significant non-confirmation to the throw over prices that we are seeing in the indexes.

The fear and extreme optimism (92% bulls) are not painting a clean picture for the bulls. Clearly what is happening is that the bears are blowing up out of shorts and giving up and longs are over extending and pushing the cash reserves to near 0. This means there will be very few buyers when we start moving down...

I am looking for a this throw over to reach some sort of emotional extreme imminently. Clearly the diagonal that most have been watching is not playing out. The action today shortens the end of P2, in my opinion. Other patterns, including a diagonal, would likely last longer.

Keep in mind that this action is most definitely NOT bull market action. In bull markets, panic buying does not often occur...additionally, patterns allow for consolidation and testing. The only testing going on with this market is highs...this is representative of advanced countertrend type activity. Bears are at wits end and Bulls can't get in quick enough or risk missing the bull market.

I am imagining that this will also cause a spike in Gold and capitulation in the dollar...due to this impression, I have exited most of the dollar contracts that I bought when $DXY was 76.7.

VIX Chart

Market Observations

VIX was up today...the whole day including from the gap up. Utilities Continued their lackluster hold of support at their channel. XLF head and shoulders are progressing nicely. Breadth was not great today...2.9 to 1.

The story of the day was the dollar which fulfilled the Ending Diagonal potential that I have previously discussed. There could be a small throw over...but overall the Dollar's down move looks finished and counts pretty close to complete. Therefore, this up move in the market is on VERY thin ice. I had been worried that the move down in the dollar could be time consuming...but am pleasantly surprised that it essentially hit my targets in 1.5 days. That shortens this rebound in the stock markets considerably.

DBA was down today regardless of the dollar and Oil traded weakly even though it was up. I was trading oil and made most of the money shorting it.

Market Observations - Problems or not?

[update 2:50 pm] After I made this post this morning, daneric posted this rather excellent depiction of the breakdown retest on friday. The RUT has a similar chart as well...but this is an excellent chart and the count i agree with also. This also reinforces the bearish patterns in the financials. I recommend looking at as many financials as possible - the charts are quite revealing. Please visit his blog at: danericselliottwaves.blogspot.com)

To me the market is setup for a fall...something like gap down Tuesday and range day to close at the lows. But lets looks at the risks to this potential:

1. Gold
2. Dollar
3. Bonds
4. Breadth
5. Symmetry
6. Inverse ETF's have not broken downtrends

Lets look at the positives for this potential:

1. Seasonality
2. Market Structure
3. Volume Patterns
4. Weak Financials
5. Oil
6. Commodities

Discussion

Gold is in position for a consolidation which is at least supportive of stockmarket retracement. However, if gold were to continue its aggressive move up, that could reinforce selling in the dollar which would likely hold the market up to some degree if not spawn a proper rally.

Bonds, if labelled as an impulse wave would need to complete 5 down which would indicate at least anecdotally that stocks should rally. If that labeling is incorrect then the structure should break to the upside NOW which would indicate a more than likely significant fall in stock price.

Breadth, according to elliottwave was a little higher on friday than they would have liked. Friday was a pre holiday trading day, easily manipulated and possibly effected by the low volume calculation of the indicator. I believe that as long as breadth was not overwhelmingly strong the day is likely to be an anomaly. And that did turn out to be the case.

Nasdaq, SP, Russell and Dow all came back to test breakdown points and for convenience closed right at them. This makes it rather simple from a symmetry standpoint...if we gap up and over those levels then the short is most likely off...if we can not get above them then the short is likely on and P3 down is probably started.

Inverse ETF's have not broken downtrends. This is a big issue. They were rejected at the down trend line. This needs to be broken pronto...or they will go lower. We got some pretty sizable up volume recently and the decline has occurred on substantially less volume - so its not that negative yet.

Seasonality, is biased towards the downside with larger investors back from vacation and likely with an itchy trigger finger. Additionally, market direction changes love to occur on three day weekends.

Counter trend move off lows of march can be counted complete and retest of bearish ending diagonal setup nicely to be a kiss good bye for the market.

Recently, down volume has been increasing and up volume has been decreasing. 2 Distribution days in the last week or so...one or two more could put a nail in the coffin.

Financials, set up a very bearish pattern this week and could not find buyers out of the selloff. In fact, individual charts like C, BAC, GE, JPM did not setup bullish candles on Friday. In fact, they look much worse than the XLF.

 

Oil continues to sell down regardless of if the dollar is doing so or not.

DBC is coming off a very nice double top and has done nothing to break its down trend. I do not see how the market can sustain a rally when commodities can not catch a bid even if the dollar is weak.

VIX

The VIX index broke nicely out of its falling wedge...and then rather interestingly fell right back into it. This is a mixed event for me. We could (as i expect) pop right back over it on the open on Tuesday or perhaps we need another test of the lower trend line which ironically would fit nicely with further dollar weakness, Gold strength and market strength.

VIX Breaks out

Market Observations

Without doing an analysis of volume...the price patterns for the SPX have completed a break of a previous swing low. Looks like we are in wave 4 of what under my view should become 5 waves down from the high. If we DO get 5 waves down this will confirm a change of direction for the market as a new impulsive wave.

What I would like to see is more of a retest of the the broken trend line as an a-b-c bounce for wave 4 and then wave 5 down to complete wave 1. If that is not the case, which I am prepared for the incongruence between the Gold, Silver, Oil and Dollar markets will tell us what will happen. If the Dollar fails to break out then its up to a new high - most likely with Gold and Silver tagging along. However, the VIX is stalking its down trend line...and may break out if we do get a wave 5 down to this impulse for wave 1.

A break of the lower trend line confirms Primary wave 3 is in progress...though I think we should be able to tell before then.

I will make more comments later...but some steady progress today.