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SPX and VIX Update: Indications this Rally Won’t Last

This market is a mixed bag of messy charts right now.  But many of the indicators I’m looking at are now suggesting the market is within 2% of a top — potentially an extremely major top. 

From an Elliott Wave perspective, it remains difficult to nail this count down, largely because the October rally leaves itself open to a lot of interpretation, as does the December decline.  I first suggested that October 27 was a major top back on October 28, and so far, that’s been a winning stance for almost two months.  The lingering doubts of alternate counts have never resolved, however, and here we sit in short term limbo. 

Let’s see what we can find to help resolve that.

We’re going to look at a couple indicators before we get to the counts.  The first one I’d like to share is the Volatility Index (VIX) to VXV ratio.  VXV is the three-month implied volatility index and tends to be more stable than VIX.  Comparing the two can yield insights… however it’s worth mentioning that the VXV has only existed since November of 2007, and thus allows limited back-testing.  The chart below is self-explanatory and shows the S&P 500 (SPX) in the top panel, the VIX:VXV in the middle, and the VIX in the bottom.  There’s a red dashed horizontal signal line toward the bottom of the VIX:VXV panel.

This chart suggests the SPX may be approaching a top, and strongly suggests the VIX is approaching a bottom.

The next chart is a very simple chart of the SPX and Nasdaq 100 (NDX).  Yesterday, the NDX was down more than 1%, while the SPX closed in the positive.  This is a pretty rare occurrence, and since 2008 has only happened one other time… at the end of September 2011.  Prior to 2008, one has to go all the way back to 2004 to find another example.  The chart shows what happened most recently.

The three times this happened in 2008, it was early on in the bear market; two of those times led to lower prices almost immediately; one of those times the market hit lower prices about a week later, then rallied for another couple weeks… and then it started crashing.  It would seem this indicator is not only confirmation of lower prices soon, but almost a confirmation of the bear market itself.

The last chart is the preferred count, which suggests a major top is coming quite soon.  The perfect world target is 1254.50, but it’s not a requirement that the market hit that level and reverse.  Anywhere between here and 1267.06 would do.  Also note that the count has already hit its blue target box. 

Above 1267.06, and the alternate count is playing out.  There’s no solid evidence of the alternate count yet — currently it can neither be confirmed nor denied, much like an Elvis sighting.  I’m favoring the preferred count over the alternate by a margin of 65%.

[Editorial note: yesterday, there was a clerical error in this chart’s labeling.  It’s been corrected.]

In conclusion, I remain long-term bearish.  The short term is a mixed bag — but due to the preponderance of evidence, I favor a bearish resolution.  Trade safe.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com

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