This is the kind of thing you see at extreme...

ETF Trends reported today that VXX volume had hit an all time high in the face of a complacent market.  In graphical terms that looks like this:

The article says "The VIX is now trading around 13.3 and averaged 14.2 a day over 2013, the lowest reading since 2006. The Volatility Index is constructed using a variety of S&P 500 Index options and measures the market’s expectations of 30-day volatility. VIX values below 20 typically reflect more complacent market conditions, whereas a VIX reading above 30 translates to large amount of investor fear and volatility."

and

 "...This volatility collapse is concerning,” Jim Strugger, managing director and derivatives strategist at MKM Partners, said in a Bloomberg article. “U.S. equities are losing any semblance of risk.”

The Volatility Index has remained relatively subdued over 2013 as investors grew more confident in face of a bull equity rally.  “Accommodative central bank policies have helped create a risk-on mentality, not just in equities but in global volatility in general across multiple asset classes,” Eric Metz, a derivatives strategist and fund manager at RiverNorth Capital Management LLC, said in the Bloomberg article."

The market is clearly getting very nervous about the forward longevity of the Bernanke put.  That is, the belief that Bernanke will support the markets no matter what is waning.  The recent tapering move makes the market wonder how much political conviction there will be to battle interest rates that are now beginning to rise.  Rising interest rates not only provide an alternative place for money to receive a return with more safety, but more importantly, rising interest rates increase the amount of debt service needed to maintain the ridiculous levels of margin debt that are currently in play.

The VXX volume appears to have peaked and now it is sliding.  Volume changes often denote trend changes.  Let it be known that VXX is not a buy and hold.  It is a short term trade at best.  But when it goes in your favor the gains can be fast and furious.  It is only for the most hardcore of gamblers and financial entertainment thrill seekers.

Having said that, my model is again predicting a possible bottoming opportunity for VXX.  I see 5 waves down in an ending diagonal but where the 5th wave stopped about mid channel after 3 properly formed waves.  That is often a bullish indicator. Stops can be very tight on this trade.  It will either treat the bump against the top rail from below as the signal to go find the real 5th wave of the ending diagonal along one of the red paths below (one indicated a lower rail bump, the other indicates a throw under) and then confirm all of this speculation by breaking back up through the top rail OR it will treat the recent action from the mid channel bounce as wave 1 up in a new upward trend.  If that is true then the recent pullback to the mid $42 level was a 2nd wave.

If the breakout scenario is in the cards we should know during tomorrow's trading day (possibly as a gap up at the open) because as seen in the graph below, the VXX pullback from Jan 2nd hit the 61.8% fib.  In addition, it formed what might turn out to be an ending diagonal.  Here's a close up look.  Note the 5 overlapping waves down, note that the lower rail could not be reached for the 5th wave.  It shows that traders were starting to get anxious on the buy side.  They were upping the sensitivity on their EW algorithms.  Or maybe their AI systems have gotten so elaborate that they decided to do it on their own.  I do not put it past them.  The first real AI that comes into this world will be driven by technology that is funded either by financial industry or by the military.

In any case, If this recent downward ending diagonal really is wave 2 of an upward trend, it makes sense that wave 1 would have tried to break out and failed and then wave 2 would pull back so that wave 3 gets a running start at it and does succeed in breaking out. If this is the case then a normal EW model would put these shares at about $45 by Jan 9th or 10th and that is if the 3rd wave does not extend like it normally does.  If wave 3 ends at $45 then the best bet is to let them ride until wave 5 kicks in because:

• with wave 1 and wave 3 not being extended, wave 5 likely will be and
• wave 2 will have been a vee style pullback and thus wave 4 will likely be a sideways triangle, etc.

And if all that plays out (that's a lot of IFFs folks) then dump the shares for the a-b-c pullback and then pile in again with confidence once you see that 5-3-5 because the next wave up will be a 3rd wave of a larger magnitude.  Big percentage gains (or losses as it were) lie within 3rd waves.

One more thing: If VXX breaks out, the broader markets will be rolling over.  We are unlikely to get one without the other.  As usual, time will tell.  It in this case we are talking about very little time - as early as tomorrow.