VIX Versus the Sp500 May the Winner Please Stand Up

The sp500 finds itself in a volatile trading range.  I have gone back and forth in my mind trying to determine bullish scenarios and bearish ones.  When I start to contemplate a near term bearish scenario (like lots more downside within 5 trading days) I run into the problem of the market being very oversold and overdue for more bounce.

When I contemplate the bullish scenario I start to wonder where the buyers will come in heavily and then realize there is a heavy resistance at 1200 where it would seem likely to see a lot of sellers again.  I think there are plenty that want second chances to get out of the market.

So I look at the bearish and bullish side of the market and unfortunately at this point I have to leave it to a 50/50 coin toss.  I can make equal arguments right now for a massive surge higher and a massive surge lower.

But I should say that I have a slight bias of more upside and a possible surge higher so the market can revert back to the mean. There are enough indicators that are so deeply oversold that it only seems logical for at least a little bit more upside action to work off the oversold levels. 

The trading action of the last several weeks has formed powerful symmetrical triangles in both the VIX and the sp500.

Either the VIX or the sp500 is going to win this battle.  I do not know which one.

vixsp50020110824 

If the VIX blasts higher out of the symmetrical then it would suggest the sp500 will blast LOWER in a bearish symmetrical triangle continuation.

If the VIX blasts lower out of the pattern, then it would suggest the sp500 blasts HIGHER out of its pattern leading to a huge upside move.

The bottom line is that there is a huge move coming on huge volume. 

The premise of the symmetrical triangle is that most of the time it is a continuation pattern.  So the previous trend before the triangle is likely to continue after the break out.  This would suggest a major break down out of the pattern in the sp500.

The measurement of the pattern in the sp500 projects to about 1000 in the sp500.

I did a google search for symmetrical triangles that act as REVERSAL patterns but could not find any sites or information that showcases examples of it happening.  I guess it is extremely rare.

To complicate matters, sometimes there occurs a busted pattern where you see an initial breakout in one direction, but then in short order a reversal back inside the pattern and then a move in the opposite direction.

This market is so crazy right now that I would not be surprised to see a busted pattern setup develop.

In the near term I am thinking that this Friday could be an important high or as late as Monday the 29th August 2011 could be that important high.

But until then I will keep watching this pattern like a hawk and provide updated interpretation as the pattern develops and maybe some new conclusions can be reached…

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7 comments on “VIX Versus the Sp500 May the Winner Please Stand Up
  1. Ricetoaster says:

    This site might help with what you’re looking for

    http://thepatternsite.com/st.html

  2. RMT says:

    When I first started following this blog, I was quite impressed with the blog and it’s analysis. Now I wonder why I’m still commenting on here…

  3. Geoff says:

    RMT – i am definitely in your camp. i think the simple answer is that this blog is set up to easily accept comments and who does not like to comment. but if the purpose of reading the blog is to get investable insite than use with extreme caution.

    The 10 moving average of ARMS / TRIN and Advance Decline have all “corrected” from the oversold conditions. The 10 day ma of Arms / Trin is now back down to 1.08 (extremely neutral reading) and the long string of 10 day average of Advance Declines that were negative for 23 days turned back positive 4 days ago. The Aall Investor Sentiment Survey posted 8/24 is also at long term average readings. I do agree with the blog that trend in motion (down) will probably continue. I think we could stay meander a couple more days in advance mode but in intermediate term, i think we head down again. Nothing has been solved unfortunately. The “dramatic” decline in gold is miniscule given gold’s price level and i think it is a pause that refreshes.

    I appreciate that blog is set up so easily to comment

  4. jsd says:

    These observations are interesting, but looking at technicals without thinking about the broader market psychology will confuse and whipsaw you, which is what we’re seeing. More likely, I see the SPX in up mode for the next few days. News in Europe has gotten boring, gold is down near 1700 again, Uncle Ben is going to say something to calm the markets (not QE3, which would be irresponsible, but something dovish). Until there is more news to fuel some selling, expect a slow uptrend. Probably flat into the weekend since nerves are still frazzled. Watch for a slow turning of the recently well-loved stocks, which tends to be a leading indicator.

  5. RMT says:

    I guess my real beef is with the way tom changes his mind so damn quickly. I know that market conditions change and we should change our opinions accordingly, but if you don’t have enough conviction to make a call, then don’t make the call. this back and forth mentality is just playing right into the hands of the big boys. Anyway i also like that its easy to comment. At the end of the day, its just a blog so I guess I really shouldn’t expect anything from here.

    I think Geoff and Jsd are right. Expect a neutral to
    upside bias for the next week leading up to the holiday weekend. We put a pivot low on 8/9 and as long as we don’t take that out, we’re in “bounce” mode. it will be choppy but I have an upside bias. If we do take out the 8/9 pivot, we could be under some selling pressure. But I doubt that would happen as the Bernank usually finds a way to pull a rabbit out of the hat. We just hit the 20 MA today which is creating some selling pressure, but I don’t think its too serious. Actually this kind of choppy sideways/slight upside is creating a nice bear flag, which could potentially set up a big fall towards last July’s pivot lows. The markets have been hammering on the current support levels quite a bit, which has weakened these support levels and the oversold nature is starting to become neutral. And I do see the DXY creating a base for a move higher in the near future, possibly in the latter part of September which will cause the markets to deflate.

  6. Tom says:

    The problem is there is a delay factor between what I am thinking and what the market does on any given day.

    What I have not changed my mind about is the bearishness of the market in late July… that was a longer term BOT short signal…

    At least I hope I was clear on that.

    But then since then I have been trying to indicate the near term swings within the downtrend. Calling for bounces and such and trying to determine how high it can bounce.

    My problem is just one days market action can can change any near term forecast immediately and so it is hard to keep up with the changes in the market. Any zig zag market is very difficult to time and even more difficult to write about consistently. It is sort of like having a computer between a teacher and a student. There is that delay factor.

    I suppose it would be better if I had a radio show and could talk about the day to day thoughts on the market moves in real time.

    The bottom line is this market is bearish on a longer term basis.

    My latest opinion based on today’s market action so far (but obviously we do not have the close today and the market could close UP today and then it would invalidate this opinion !!)

    is that since the VIX has shown strong uptrendline support, we are due for a MASSIVE down move during the next 6 trading days or so into September 2, 2011. But we really need a negative closet today.

    If we reverse by end of day and close positive then I cannot keep that same opinion.

    There is the real potential for all hell to break loose the next 6 trading days.

    Last night I was working on a possible theory that the market would go UP for the next 5 to 6 trading days… but today’s action seems to be telling me we are not going to do that anymore… we could be ready to go HARD DOWN very soon.

    The DAX germany index dropped 5% in 20 minutes today !!!!!

    Urgent caution advised.. we may be approaching a blow off sell off (panic) type move in US markets very soon…

  7. RMT says:

    Tom, thanks for the reply. I hope you understand how it can be a bit frustrating from our perspective as well. I come to this site because I take your opinion seriously ( obviously I don’t trade off it), but I respect what you have to say. But when you change your mind so frequently ( and often get it wrong), I have to question whether I’m wasting my time here. market timing is difficult and I respect you for trying, so don’t take it too personally. I’m probably to blame for expecting too much from here, so I guess i’ll reduce my expectations from now on.

    Todays tape looks weak, but as i’ve said as long as the spy doesn’t take out 8/9 pivot, we’re in “bounce” mode, at least until the holiday weekend. Today we hit daily 20 MA after a massive move higher so a retrace should have been expected. I’ll start to get concerned about my “bounce” if we close below the 114.5 level on spy (that’s a .382 fib retrace and an important support level.. I actually have a small long position in the spy which I entered at the 114 level.i also expect a a huge fall coming, but still deciding when the most likely scenario is for that to happen. I really would be shocked if we plunged lower in the next 6 days

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