S+P model says: time for the bears to take the wheel.

We are in the middle of an epic battle between bulls and bears.  Most people don't recognize this yet but the recent volatility tells me that the bears are awakening, not just sleeping anymore.  What most people don't really understand is that much of the market cap of these markets is driven by record amounts of margin debt.  The bulls have had an easy run because Bernanke held the interest rates down and they bulls borrowed money to go gamble in the markets with.  But now everyone who can even spell "bull" is not only fully invested, they are invested on leverage.  That means the bulls could lose a lot if they zig when they should have zagged.

The greatest force that the bulls had was leverage/debt used for investment.  They didn't have to tell the truth about their balance sheets.  They didn't have to limit their leverage.  They didn't have to pay high interest rates that should have been required for this risky activity.  Bernanke made it easy for them.  But once everyone starts heading for the door it won't be because of Phony Phundamentals of the shares.  The extra leverage and credit has already distorted the heck out of that.  It will be because the last man out of the Debt Ponzi gets stuck holding an empty bag and they all know it.

That these markets will collapse at some point is a foregone conclusion.  When they collapse is a mystery that we are trying to unravel via the Elliott wave count.

And the count tells me that something interesting has occurred: a 5-3-5 pattern has emerged and now we are seeing owl ears (declining double top).  That could mean that the massive bounce over the past 4 days was an a-b-c retracement and not the start of a new wave up.  Of course, the jury is still out on that larger question but the smaller reality is that we just finished 2 sets of 5 waves each without a breather and now the declining double top tells me the bulls are tired and need a rest.

So, here is my model for the next couple days.  We should get a gap down at the open tomorrow because at the close today we had a perfect setup for a 3rd of a 3rd tomorrow.  From the size of that first wave down and from the fact that I think a 1-2, 1-2 pattern has emerged, I think wave 1 down ends between 1796 and 1800 on the S+P.  I piled back into TVIX at the close in order to catch that move.  Time will tell if that was a wise or foolish move but it was certainly not a random decision.