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Tuesday, August 14, 2012

SPX, INDU, and VIX Updates: Dow in a Turn Window; VIX Suggests Complacency



When I first glanced at Monday's charts, I thought I would have nothing to add to the prior update -- however, upon closer inspection, there are a number of interesting things to share.  I'm going to keep the commentary brief and focus on the charts today.

The first chart of interest is the VIX:VXV ratio, which I've mentioned on several occasions in the past.  This ratio measures the Volatility Index (VIX) compared to the 3-month Volatility Index (VXV).  In the past, this has worked well as an indicator that VIX is bottoming -- and usually when volatility finds a bottom, it means that equities are finding some type of top.

Note this ratio is currently showing its second lowest reading of all-time -- the lowest reading was in March of 2012, as noted.  This suggests that there's again a very high level of complacency among investors.





The next chart shows two time-cycles which the Dow Jones Industrial Average (INDU) has been responding to since the 2009 bottom; I stumbled upon these cycles quite by accident earlier this year.  Note the cycle shown in blue has reached its turn window; and most prior windows have marked decent turns -- including the 2011 top and October bottom.  The red cycle window last opened near the 2012 top, and won't reach another window until November. 




The next chart is a 3-minute chart of the S&P 500 (SPX) and shows that the sideways move of the past week-plus may have finally reached completion.  The move is still very messy, but the primary count suggests that the correction is complete and the market should move higher over the short-term.  Trade beneath 1395 would invalidate that short-term outlook.






The 30-minute chart still remains essentially unchanged since August 3, but adds perspective to the 3-minute chart above, and outlines some signals to watch.  I'd still like to see the market take a stab at higher prices here; though significant breakouts would negate the bear case for the moment.





Finally, a simple chart of the US Dollar.  On September 3, 2011, I turned long-term bullish on the dollar, but recently, on July 26, I switched from bullish to neutral.  I'm still neutral, and in watch-and-wait mode here -- so the chart outlines what I'm watching at the moment.  Interesting that the dollar may be completing a bullish falling wedge concurrent with SPX completing a bearish rising wedge.

The challenge remains that this pattern may not be a wedge, but a wind up to as stronger continuation move -- so it bears careful watching in both USD and SPX.





In conclusion, unless nothing bearish works here, there continues to be additional evidence that a top may be under construction.  Over the past week or so, I've outlined a number of signals which, on most past occasions, have been precursors to topping markets.  In addition to the signals mentioned today, two other recent signals include the ratio of Nasdaq total volume to NYSE total volume (now historically very high); and the concurrent new 50-day highs in TNX and SPX.

Of course, the last time the market generated this many top signals was late-January 2012, and it ended up marching right through them.  Nothing works with 100% accuracy, and these signals are based on the fact that they've performed well in the majority of past occasions; so it would be foolish to simply ignore them.  Of course, as I've said before: price is the final authority.  So while it appears higher prices are probable over the short-term, for the moment, I remain cautiously intermediate-term bearish.  Trade safe.

Reprinted by permission; copyright 2012 Minyanville Media Inc.

3 comments:

  1. Hi Pretz,
    my link to the 'new' site has vanished hence this post here.
    Been away for a while but FWIW my take on INDU et al is that the prior 5w down was an 'A' wave so we're in a 'B' wave, messy complex, muddled, weird.... (need to change EVERY label darn it!).
    There is a gap in NDX at 2766.9 which it looks nailed on to close. (No-one has commented on it. ?.).
    This is +1% & change which would make new highs in SPX and INDU.
    Also as you know I've posted many AAPL commenst as it is the market lode-stone IMHO and this sort of rise would take it to a new (final) high/top and all the markets would then go down in unison. Nice.
    Average daily gain in the last 'up' wave was 0.25% so we are looking at 4-5 days more.
    As you point out VIX is on the floor and Volume across the board is lower than anything other than Christmas Eve and Thanksgiving for the past many years.
    Summary: bullish 1 week, bearish thereafter.
    kind regards
    UKDNY :)
    PS 'course it could all be fantasy, but hey I can dream !!

    ReplyDelete
  2. UK, great to hear from you!  I miss our discussions.   Here's the link to the site:

    http://deepwaveanalytics.com/forums/index.php

    Come hang out! :)   I approved your account some time ago, but if you have any trouble logging on, just let me know. 

    ReplyDelete
  3. Christian GustafsonAugust 14, 2012 at 6:49 PM

    Hi Pretzel.

    That next red cycle window is a full moon bottom at the end of October.  SPX will be in the 980-1000 range, and retrace back up to 1200 into the December FOMC.  

    ReplyDelete