Saturday, 9 June 2012

Weekly Index Cycles - mid-term doom still ahead

With main wave'1 having completed (see daily cycle charts), some are suggesting the market has put in a floor for the months ahead.  However, the bigger monthly cycle is paramount to keep in mind, and after another week or so of upside, this market is set to break the recent sp'1266 low.

IWM (representing the rus'2000 small cap)

IWM certainly had a reasonable up week of +4%. Yet IWM could not break/hold over 85 this year, and I doubt it will break 85 for a very long time to come. The current upside target is around 79/80. Only a break over 81.50 would be a problem for the larger bearish outlook.

Nasdaq comp


I can't imagine the dow breaking new highs in the near term. There are some out there touting dow back in the 13300/500 range...I don't think so. I'm looking for a bounce to around 12750/850..and then a new wave'3 lower.

NYSE comp


Sp'1370 will be very strong resistance level in the coming week, although I think there is an equally large problem for the bulls around 1350/60. The descending line (grey) will be 1400 in the coming week, I can't imagine a move over there at any point.


The old leader has been stuck for months, and remains a huge warning that there are very serious problems ahead. We're back above the big 5000 level, but I'm sure we'll close the month under it.


The bull maniacs are very relieved this weekend, and are again touting new highs of sp'>1422 in the months ahead. The Fed are going to do more QE, and Europe will be magically fixed too with more bailout/LTRO money, right? Err, no.

So many sell signals triggered in May, all we are seeing right now is a pretty standard strong wave'2 up. Considering that wave'1 took 5 weeks, it would be very reasonable to expect that wave'2 will take around 2-3 weeks. Very much the '2 steps down, 1 step up' style of market trend.

For those who can keep the bigger monthly cycle in mind, a further 2/3% rise in the indexes this coming week will merely provide for more ideal shorting opportunities.

*If you haven't already read it, I highly recommend you check my previous posting on the VIX, it will help put the past weeks gains into perspective.

So, to be clear, my sp' target for the coming week is 1350/60, which would equate VIX in the 18s. I believe it is very possible wave'2 will complete by the end of next week.

Good wishes

Volatility (VIX) set to explode

For many out there, things are back to the original bullish 2012 outlook, its all fixed now, right? With three reasonably strong up days, after last Fridays dow -270 day, everything is back on track.

It remains incredible just how manic-depressive this market is. Even the cheerleading maniacs on the two main clown channels were getting back to their usual 'its all fine now' proclamations. From them being on suicide watch last Friday, to them again gleefully looking forward to the rest of the year, truly bizarre.

A new chart to consider

To end this Friday, and lead into the weekend, I've a new chart to throw out into the murky corners of the  internetz ;) This should be quite interesting to some of you, since VIX across the last few years has been one of the most dynamic and profitable trades available.

VIX, weekly, scenarios


The VIX high of 89.53 - Oct 20' 2008, seems impossible to ever reach again to most. Certainly, the cheerleaders on the clown networks would never believe we'll ever return to those levels. VIX 80s are clearly impossible, right? Just last evening I put together the new VIX scenario chart....

...and just this morning on Zerohedge I noticed this story
Citi Matrix Outcomes If "Disorderly Grexit", then VIX at 80

It was very pleasing to see someone else - a major financial institution no less, open to the idea of VIX back to the 'end of the world' 80 level, if things do unravel in Europe.

So which VIX scenario? 

First, a reminder on the sp' monthly index scenario chart....

Sp, monthly, scenarios

My outlook since the world indexes started to rollover since January was for the sp' to cycle down to the lower channel/wedge line of 1100 or so. I've been very reluctant to target anything lower than 1100 - not least since we know the Bernanke will be looking to initiate further QE. So, scenario B remains my 'best guess' for this year on the indexes.

In terms of the VIX, that would likely equate to scenario B, where the VIX breaks into the high 30s/40s - but not above the recent highs of summer 2010/11 of VIX 49.

Lets be really clear about one thing...a VIX over 50, and we're in a whole different world again, the world of economic 'omg, is the end here?', full worldwide market terror. We've not seen VIX 50s since the March 2009 lows, so it would be a VERY significant level to break.

My general outlook is that the world indexes have a high probability of flooring by late July/August (IBEX 5000 for instance)...with sp'1100....and at that point the Bernanke will appear, to initiate a new round of QE. Not just bond curve manipulation - the QE twist, but old-school QE1/2 style, via POMO..and the bears sure should remember how those POMO days worked out for the equity/commodity markets.

As for the other VIX scenarios...

A - seems almost impossible to envision VIX remaining low across the summer, that would assume sp' does not break any lower than sp'1266. No way.
B - as noted above, remains my best guess
C- A break over VIX 50, and yes, I can imagine VIX briefly spiking into the mid 60s, in terms of the index scenario that would probably equate to scenario D.
D- Very viable, if we get massive summer upset, but the Bernanke appears (along with other central banks) to do more QE, which inspires a substantial rally.

The Outlook

So my targets are SP'1100, with VIX in the 40s, no later than late July, and then the Fed' to announce a major new round of QE in early August. For me, with all the charts I have, all the news stories I've read, and consideration of all the many other chartists out there, that is my best guess.

As noted though, if we see sp' break under 1100, VIX 50s, and IBEX <5000 (along with the equivalent on other world indexes), then we will be in a very much more serious bearish situation.

Goodnight, and have a good weekend