VIX Pointing Toward Correction

Perhaps today's high completed the rally from the December low, or perhaps the market needs another push higher.  Either way exhaustion seems to be setting in.  IBD continues to note that leading stocks haven't really participated on the up days recently.  

The VIX is showing a positive divergence with a higher low against the SP500's higher high.  This alone is a strong indication that the long awaited correction is near at hand.  A move back to the 1300 to 1340 level +/- would be the expected outcome.  I think we will know before the end of the week if it has come to pass.

One problem that I see is that there are few stocks to short unless you want to try to pick tops.  My recent stab at AAPL was a failure, as such top picking efforts usually are.  However, there a few possibilities.  AMZN is one of them.  It was down 7.6% in February versus a gain of 6.4% for the Qs, and it is on the verge of breaking a 3rd trendline.  The head and shoulders top formation gives a target of around $130.

As long as the October highs hold as support in the indexes, this correction will be another buying opportunity.

TLT Forming A Triangle

The TLT appears to be forming a very long triangle that should lead to an upside breakout later this year.  If so, the target is 132 to 140.

Very little has happened this week as the market has stalled out with the SP500 just below the 2011 high.  It looks like the SP500 will try to breach that high next week before rolling over, but the selling could begin from the outset on Monday.

Stalling At The Median Line

The SP500 is stalling just above the median line for the rally as negative divergences continue to develop.  Failure to reach the upper channel line suggests that a return to the lower channel line or to support at the October high will be the target for a correction.  A break of 1337 should be the first indication that the correction is in progress and a short term top is in.

Setup For A Correction

Oftentimes the terms pullback and correction are used interchangeably, but perhaps it would be better to make a distinction.  Let's use the term pullback to describe a minor decline of smaller degree within an ongoing uptrend and a correction as a larger decline that concludes an uptrend at the current degree of trend.  It appears that we are near the conclusion of minute wave [iii] of minor wave 1 of the current uptrend from the December low.  The November low, though higher than the October low, was probably the orthodox low of the 2011 correction, so technically the rally began off of the November low.  It is a small distinction that is not of immediate importance, but it may be important later.

The positive divergence in the VIX suggests that the wave [iv] correction is near.  It should be proportional in time and price to the correction into the December low, or about 65 points in 8 to 10 days.  The clear resistance zone in the VIX should not be violated if the correction is to remain contained.  A move above resistance would indicate a larger correction is underway.

After the correction ends, we may expect another 8 to 10 day rally to complete minor wave 1 followed by a deeper correction into the April/May time period.  Based on this view, it may be best to take profits early after the next rally begins with a possible double top to end it.

AAPL Sports A Bearish Engulfing Candle

A huge reversal today in AAPL along with the Qs pushing into the target zone probably means the long awaited pullback is finally upon us.  The Qs will most likely retest the 2011 high at 59.83.  I am not planning to short the indexes unless the Qs break and sustain below the 2011 highs.  I am short AAPL from 498.64 with a target in the 427 to 443 range.

Running Out Of Steam

The McClellan Oscillator has now made a lower high from its October peak which was the initial thrust off of the low for this this rally.  At most we might expect one more push higher in the NYMO to form another lower high as the SP500 pushes into resistance in the 1360 to 1370 zone.  The momentum of the NYMO has turned sharply lower, which suggests that a correction may come sooner than later.  

This is not the time to be the hero as a multi-week rally into old highs rarely breaks through on the first try, just as it could not in November 2010.  I will be selling short-term and intermediate-term long positions this week, and looking for shorting opportunities in individual stocks, but not in the indexes, in anticipation of a correction lasting 2 to 8 weeks that should bring the SP500 back down to the 1300 level, which will probably be a great place to get long again.

So far, this has been a great year for longs, and I expect it will continue to be so.

In The Zone

Looking For A Pullback

We haven't seen a pullback in some time, and there is no way to predict exactly when a 3rd wave will end, but we should be on the lookout for a pullback between now and the early March.  The most likely pattern for the pullback would be a triangle with wave [v] to follow up to new rally highs afterward.  Calls for a major top continue to build, but the technical support for it is waning.  I would only alter my view if the Qs fell below the 2011 high.  For now, it's time to tread lightly until there is another buying opportunity.

A Market That Just Won't Quit

Despite attempts by many, including myself, to find a top in this rally, the market seems content to keep marching higher.  Since August I believed that we were in wave (X) of [X], but the action in the Qs this week seems to negate that view as almost the entire weekly bar is above the 2011 highs.  And now we have a weekly squeeze long signal in the Qs as well to go along with already existing signals in the SP500 and the Russell 2000.  The last time there was such a confluence of weekly signals was 2010, which led to a 19 week rally after the signal week.  

I will look at a new wave count next week, but the best interpretation is that the November low completed the combination correction.  This means the Qs are now in wave [iii] of 1 of (A) of [Y].  Wave [ii] ended at the December low.  Typical fib projections of wave [i] put a target for the Qs at 65.58 to 69.94.  I suspect 65.58 will be seen at least before wave [iii] ends.  A 2 to 3 week correction in wave [iv] should follow as a flat, expanded flat or triangle (I would bet on a triangle given the market strength), and then wave [v] with a target between 69.07 and 74.47.  If wave [Y] = wave [W], wave [Y] will end somewhere around 90, but if speculative fever takes over, we could see a retest of the 2000 highs.

  

There will be pullbacks of course, but until we begin to see some distribution the only place to be is long, with perhaps a few exceptions.  As things heated up this week I began to add new long positions and will continue to do so until I see a reason not to.  I had exited STX with a 26% gain off of its pullback to the 50ma, only to see it rocket higher another 30%.  This was a pretty good clue that my original view was wrong.

There are those who continue to wait for the mythical wave [3] down, but I believe those hopes will be dashed when the SP500 eclipses the 2011 highs over the next few weeks.

Oil Closes Off Its Low

Oil closed off its low today (sic-not in the upper half of the range).  The main problem with the short perspective is failure to accelerate to the downside.  The action since the high on 1/4 now looks more corrective than impulsive, which negates the possibility of a flat correction and raises the probability that a triangle is underway.  The existing squeeze setup may turn out to trigger long.  If so, the first target is around 102.  Only a break of today's low with a close under support would change this view.