Tuesday, October 12, 2010

VIX Sell Warning

First things first. My proposed 5 wave impulse count for the Qs appears to be toast as the Qs moved higher today in a continuing pattern of overlapping 3 wave movements. This means that the Qs are probably working on an ending diagonal pattern (EDT) like the other stock indexes. The IWM is still the index that is closest to completion. The Qs will probably top later than the others.

We now have a VIX sell warning as the VIX has closed below the lower 20 day x 2 SD Bollinger Band. The last two occurences of this condition were 1/11/10 and 4/12/10. The SP500 topped on 1/19/10 and 4/26/10. It would be surprising to see the indexes hold for another two weeks at this point given how far advanced the EDT patterns are.

Unlike the other indexes, the Qs clearly have another down-up sequence to go before topping and will very likely make a new high above the April high, which is now only 54c away from today's close. The interesting thing about this outcome is that it keeps the longer term bullish view intact, as we are now back to a flat, expanded flat or triangle correction for wave [B] of the larger [A], [B], [C] cyclical bull market upward correction. There is no way to know which it will be, but a retest of the July low would be a great opportunity. We may just be looking at wave C of a triangle, however, that retraces 62% of wave B up.

The only thing that would derail these interpretations at this point would be a powerful and explosive up day that we would have to view as a 3rd of a 3rd wave. If we see that, then the bears will be crushed, but such a move does not seem consistent with the action in the VIX.

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