Step Back!

Twice now, in the past week or so, my wave count has been thrown into disarray.  I did not have a lot of confidence before today, and I have considerably less confidence in the direction now.  Therefore, you are in for a treat as I am going to step back and walk through my thoughts with you.  It might be a little wordy, but I will try to keep it full of charts to help smooth it over.  Enjoy.

I am going to start out on monthly, and work down into hourly charts, and I am going to use $SPX (by popular demand) and the $NDX.  With the $NDX monthly, it is plain and simple.  We have completely broken the long-term trendline, and are bouncing between horizontal resistances.  Woot!

For the $SPX, the purple channel of the double top, and main bottoms seems to be the key.  We have broken a major trendline, and are well into the middle of nowhere, so now it is down to weekly.

With the $NDX, on weekly, I have some interesting information that jumps out at me.  Nice reversal candles forming and a similar divergent histogram formation, and all forming around a strong resistance, which the $NDX spiked both times.  I can also count 5 complete waves down (in 3), so the upside is looking brighter.  The only thing that discourages that thought is the weekly MAs (which I, personally, don’t use, but hedgies do!!), are heading for a cross-over, and I would be surprised to see it not cross at this point.  The $SPX weekly chart shows nothing interesting except for a MACD divergence.

The daily chart is more bullish.  We have strong divergence.  We have a piercing pattern.  And we have already rallied nearly 15%.  We have broken from the most bearish downtrend channel, and breadth was expanding.  All of this paints a quite bullish picture.  Granted, it is Thanksgiving week, and the market volume should continue to get lighter, this should be taken as a strong bullish signal.  We also comment frequently that the day after a huge reversal speaks more than the reversal itself, and today, we got a SOLID follow-through.  $SPX is more of the same…

On the hourly level, we can start to focus on the first of our targets.  In the $NDX, that range is between 1170 and 1200.  From that range, we should expect a drop as a wave 2 corrects the first motive wave in the move.  That range should include the open gap just South of 1100, though 1110 would give us a nice set up for a small H/S bottom.  Once we get our first completed move up and down, we can begin to hone in on the larger targets to the upside, as shown on the daily chart, as the wave count begins to present itself.

With the $SPX, the logical upside target would be 875, and should we break that, a range surrounding 900.  One could argue now that a 5 wave advance is complete, and that we could be in for a decline, targeting 780 fairly soon.  $SPX is sporing the same divergence that the $NDX is, though is closer to closing out side the 2.0BB.  Which brings me to a point that the $SPX and $INDU (i.e. Blue chips) are leading the advance.  This is another piece of evidence that suggests that the upside is begging rather than preparing for more downside.  Buying the Blue chips indicates that investor sentiment has moved to more conservative issues, finally not wanting to be a speculator, at just the time when a speculator is a low risk idea.

All of this (finally) brings me to the $VIX, which is looking mighty top-heavy.  After missing a buy signal (which at this point would have been confirmed) by only pennies, the $VIX has taken a hefty price cut (20%).  A minimum target would be the 50MA at 56ish, while the larger target seems logically set around 35, which is an open gap.  The double top pattern target would be looking for single digits, and for some reason, I just don’t buy that.

Either way, trading will be different moving forward.  Buying call options will not be as lucrative until the $VIX is back into the 50s or 40s.  Until then, trading spreads and cheap stock, or look to buy more ITM, as those options will be hurt less by an IV crush.  We will have more on this later on, but check out some cheap stocks I am eyeing right now… C, AKS, BX, SWHC (perhaps a push lower, maybe 1.50?), DRYS, FWLT, GNK, ACI, TSO, and the list goes on, but that should give you something to chew on.  And I know you are thinking, “why can’t I just buy calls?”  You can, just make sure they are ITM, as those cheap OTM calls will likely get much cheaper, cutting into profits.  Again, this will not be as big of a deal once we breach the 50s in $VIX.  We just need to give it some time.

Before I leave you, let me repeat that we should be in for a short term drop in the near future, and that this drop SHOULD carry us to levels below where we currently are.  Towards those lower levels would be a great time to exit short positions, rather than selling at resistance.  This might mean there is a little more pain before we drop, and I am not recommending anyone hold a position beyond their pre-determined exit level, merely saying I expect a small move lower before another large move higher.

Skål!

Mole here – just wanted to tag this on – you might get a kick out of it: