Let’s Get Ready To Rumble!

Ladies and Leeches ….

… from the murky depths of Evil Central …

… for the heavy weight championship in bulltart smackdown …

… let’s get rrreeeeadyyy to rrrrrummbleeeeeeee!!!

Welcome to the jungle, rats – I hope you’re pumped and ready to roll because starting at 9:30am Eastern tomorrow morning it’ll get messy and we won’t be taking prisoners. Now, fasten your seat belts and put your stewardess in an upright position – we’re ready for take off.

Before we get to our latest SPX forecast let’s once more take a quick stroll down memory lane. This is the chart I posted on November 30th. We had just completed a major slingshot rally from the November 20th lows and I was preparing you rats for the ‘house of whipsaw’ that was ahead of us.

Boy, I wasn’t kidding – whipsaw galore would be an understatement but most of all the road map I painted back then has been spot on (thus far). I have to admit that I was sweating bullets when we were 1 point away from breaking the wave pattern on the 29th, but those intrepid black boxes kicked in and drove the SPX 74 points to the upside. I was practically in tears watching the tape all last week – Santa finally came to town with a sled full of presents. Better late than never I say!

I think the chart above is quite clear in respect to our evil plan. The wave count would look the best if we rally a bit more on Monday. My hope is that we get near that 957 short retracement level, which at last count had a 100% probability. Now, 2sweeties tells me that you can’t expect things to bounce right on the spot – maybe we’ll get a bit of throwover. But in any case – either there or on any sign of weakness I will be backing up the truck and load up on far OTM June SPY puts. The market is extremely overbought and, although further upside is not impossible, on a long term perspective a few more points to the upside really do not matter.

In that context – something you rats should however take a very serious look at is Mr. VIX. Several very interesting observations on this chart. What you are looking at is actually a comparison between the SPX and the VIX. First up observe the beautiful motive wave up followed by an a/b/c correction to the downside which appears to be almost done. Secondly take a look at where we are! Mr. VIX is back at basecamp at around 40 (was stretching its legs at 37 briefly on Friday) while the SPX was trading at about 932.

So, let’s be generous and assume that we most likely push up to 950 on Monday (we better!) and that Mr. VIX won’t even move. Where was the VIX last time we were trading around 950 in the SPX? The answer is at about 57! And that crossover point on the chart (marked in cyan) is actually our max target for the blue scenario – the SPX was at around 1040 and the VIX at that time was around 46. BTW, in case you wonder when the VIX was at 40 the last time – 9/19/08 and the SPX was at around 1,150.

Now, assuming where we’ve been in the past few months seeing a VIX at 40 right now is like seeing manna fall from heaven. When it comes to free SWAG from the market makers this is like X-Mas, your birthday, the first time you got laid, and the day you graduated all put together. Trust me when I say this leeches, it will be quite a while before you see the VIX that low again – mark my words. We might push lower in the coming week or two, but nothing in life is guaranteed. After that better get used to high flying IV again and a screwed up options market.

Fact is that the VIX is low now and if you know anything about options then you know that vega = volatility and increase in vega can make your options explode without a movement in price. This can of course backfire: Some of you learned that lesson the hard way trying to play the market up after November 20th. Vega kept dropping from high extremes, curbing profits on calls despite large moves to the upside.

Now, looking the 2nd chart again – I have also marked an exit point for taking profits on front month options. The timing here is wonderful as I expect the expiration of January puts to coincide with the bottom of wave {c} to the downside.

The Dollar so far has behaved nicely and unless I see a close below 78.5 I expect to see a continuous rally to the upside as the a/b/c correction appears to be complete.

In that context let’s look at a comparison chart between the buck and our favorite precious metal – Gold. It’s quite obvious that Gold is closely correlated to the movements of the ole’ Dollar and in my mind the rally we’ve seen wasn’t due to strength in Gold but due to a weakness in the Dollar.

Which supports my current outlook on Gold touching 650 before we see 1000 again. If you were around last week you might have noticed that, despite its recent direct correlation, Gold did not partipate in our equity rally, given further credence that resistance overhead will be significant. Of course – if we breach the 920 level in Gold then my wave count goes down the toilet. But I think such a move might be accompanied by a major drop in the old buck as well.

Again, for your noobs who haven’t followed my Gold analysis in the past months: Long term I’m very bullish on Gold and I see plenty of upside for the shiny stuff in 2009. But near term I’m equally bearish as the wave count seems incomplete – I’m still counting only six waves. Remember what I said on December 14th:

Whenever an internal count is becoming unclear I always take a step back and try to reach a conclusion by merely counting waves. A count of 9, 13, or 17 with few overlaps (motive + extensions), for instance is likely motive, while a count of 7, 11 or 15 is likely corrective. Right now I am counting 6 major waves in Gold and they are overlapping heavily, leading me to believe that we get 3 more counts to the downside.

Nothing has changed since and the probabilities according to the wave count, the overhead resistance plus the expected action in the Dollar points towards a final large move to the downside. Unless I see 920 breached I consider this current rally nothing but another trap for those intrepid gold bugs.

Not much has changed in respect to our ancillary momentum indicators:

McClellan Oscillator (medium term): Heavily overbought – we went from one extreme to another.

NYSE Bullish Percent Index (long term): Heavily overbought – 60 is about the top but of course we’ve been at 2, so it’s possible that we see another push up. But trust me – this rally is about to break – as traders this is a level we cannot ignore and in terms of risk management this is probably as sweet as it gets.

Alright, I think this should get you leeches who just returned from vacation up to speed and ready for Monday. I will dig around for overbought victims later this evening and probably start dropping them into your laps throughout tomorrow.

Cheers!