Take your pick, from five of infinity

The monthly index cycles are showing the first real turn lower since last October. There are of course infinite possibilities, but lets consider five of the main ones.

Sp' monthly, 6yr

Without question, the weekly and daily charts are highly supportive of a near term pullback, at least to 1340, if not 1300. However, the real question remains, what then?


The broad five scenarios

A - a near term pullback to 1340/00, then a significant wave up to new post-2009 highs, either 1430/40...or if broken over..probably 1550.
B - a further move to the base of the huge giant broadening wedge, 1100/1150 by around October, before a further huge up cycle - 'inspired' by QE3 ?
C - a bounce off the lower wedge floor, before a lower high, and a further major break lower in 2013
D - Assumes the wedge is taken out in the next wave, with a backtest more likely in early 2013, before significant carnage across much of 2013 - a highly deflationary outlook
E- Assumes an economic 'shock' + overall deflationary pressures, the 'straight down into hell' scenario.


Not just an academic curiosity

I can understand some suggesting such considerations are pointless or mere academic curiosities, but, I would argue even the short term traders should be keeping such things in mind. The coming days and weeks will probably be critical in where we trend for the rest of this year.

We have seen significant pullbacks beginning around this time both last year and of course in 2010. The central banks have managed what many thought unthinkable, kicking this stinky can along the dirt road over and over again. The system is largely a CONfidence game of course, and if the masses ever do awaken to the reality, then scenario E could become the scary reality. Although, lower stock prices are not exactly the prime concern for many these days.


So...which one did you choose?

For the record, my 'best guess' right now, is scenario B, where I believe the Bernanke will initiate QE3 after the indexes have hit 1150/00. Most interesting at that point, will be the reaction in the precious metals market. Both Gold and Silver are arguably under-valued by a factor of 3 (or 15x if you consider monetary base since 1980), without any doubt, we are going to see both explode to the upside at some point.

I'll certainly be returning to this chart in the months to come.

Goodnight

Volatility set to jump

It would appear that even under a mid-term bullish market outlook, the VIX should still jump to the mid 20s this coming week. The ultimate issue is can VIX break into the high 20s, which may confirm - along with the index monthly cycle, that the market is indeed starting to change its broader trend.


VIX 60min

Near term intra-day action from Friday, still held within a larger multi-week bull flag. We need a clear break over 21 to confirm the flag...and then next target is 24.


VIX, daily

Daily cycle shows the bull flag..and the 24 target/resistance level. The MACD (blue bar histogram) is still cycling lower though, the trend IS admittedly down.


VIX, weekly

The huge down trend since the last Aug' peak of 48 is indeed over. So far, we have just a 5 week moderate rally from the 14 floor. Upper bollinger allows VIX'25 - and that is one valid reason why mid 20s are easily viable in the week ahead.


VIX - bearish market scenario

This is arguably a doomster chart, and so it is to be considered with a high degree of caution. Only SP'1300..or more likely 1270/50 would get VIX back above 30.


VIX - bullish market scenario

Right now, this chart seems the most balanced outlook in the very near term. A bounce to 24, and then another relentless slide lower into May/June.


Summary

The coming week will be an important one. The bear flags on the daily index cycles are surely going to be confirmed, and we should hit sp'1340, if not 1300 within 5-9 trading days. Yet, even if we do get down to that level, the VIX could easily get stuck in the 24-28 range.

Bears still need to be very careful in the weeks ahead, we still have the Facebook IPO, and we all know the Bernanke will be wanting to give asset prices another major kick - commodities ARE very weak, and with employment gains still moderate, he does have some valid excuses to do so.

So...look for VIX to break 21 early this week, and then to hit 24. There IS a fair bit of 'omg, we're going to flash crash' chatter out there again right now. It is from people of very different perspectives, so that is interesting in itself. Yet, we are barely 40pts from the sp'1422 peak, so the bears really can't get too bold yet.

What matters most of all, will be the size and speed, of the market declines. Anything in the range of dow -125/175 is just minor noise. The doomer bears will need to see at least one day where the dow is -275/325. Only that amount of decline would be suggestive of a mid-term break under sp'1300.

Good wishes

Something to lead into the weekend

Tis late, but I wanted to throw one final chart out there for this trading week...

Dow', weekly

The Dow weekly is 100% bearish for next week.

Target... 12200.

Yeah...800 points lower.. 'sometime' during next week.
-

Its something to aim for, and having an aim...well, isn't that a good thing?

Goodnight