Saturday, February 18, 2012

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.

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