Here We Go Again

And yet again the vexing VIX is in the process of painting an equities buy signal:

Question is this now – what are the chances we bust higher and NOT snap back sometime this week – thus producing the second and eventually third confirmation?

Let’s look at two other charts I find very interesting:

Remember that SPX:VIX ratio daily chart? Thus far it has remained spot on in supporting a continued melt up higher. However, what’s interesting is that sudden drop down (the blue line) which is often what we see during a period of distribution and an impending sell off.

The daily Zero is at an important resistance line which it needs to breach to assure a continuation of the uptrend throughout December. Since that resistance line sloped in a very shallow fashion equities have been playing ping pong as of late – but we are now approaching the end of the line – no pun intended. The zero mark is touching the upper diagonal sometime next week and the bulls need a breach, otherwise things may fall apart quickly. If it fails to breach we may see some early fireworks, thus I’m keeping a close watch on this chart – and so should you.

Bottom Line:

I know I may start to sound like a broken record but yet again I must point out that the recent volatility in volatility (i.e. the sudden moves in the VIX) does not support the idea of a healthy market. IMNSHO Mr. Bernanke is now using nine fingers to keep the dam from breaking and at some point good old gravity will take its merry course. I can see it on the charts – you can only delay an overdue correction after a rally build on vapor for that long. We are now seeing back to back POMO auctions all the way into mid December – thus far producing very little upside progress. Whatever used to work very well is not working anymore. Maybe it’s wishful thinking but it ‘feels like’ (yes, I just said that) as if Bernanke’s can is approaching the end of the road.

Now, my weekend report mentioned that I see the odds for a reversal as pretty low. But since then we have watched two very weak sessions despite two POMO auctions on Monday. So, I have to leave that bearish door open – although I’m still very skeptical I am not dismissing the idea that a correction may happen during December. BUT that DZ must stay below the diagonal and the VIX buy signal must either invalidate (i.e. VIX pushes higher tomorrow) or we get a buy signal that only leads to more sideways tape. In other words – bears, make your move and make it now. You don’t want to wait until the tape gets too thin.

I have to admit – as much as I love Christmas – I’m very much looking forward to January. If nothing else it should be an interesting month 😉

Cheers,

Mole