VXX ending diagonal model won the day.

At significant direction changes it can be difficult to see the chart pattern in real time.  That's why I sometimes produce multiple and at times competing models.  Fortunately, I documented the right model in this post which helped me manage my TVIX trades.

If blue 5 shown below is wave 1 up then we are working on wave 2 down right now.  2nd waves of a new trend are notoriously hard on traders because you don't know for sure that the direction has changed.  You have to assume that it has while being fearful that it hasn't.  The market is good at creating fear, uncertainty and doubt in the mind of the trader, especially those who have no trading plan because they have no trading model to go by.  This is the real value of EW.  It gives you something to shoot for and tells you when you got it wrong.

2nd wave personality in a new bear market is that the bulls believe it is just a normal retracement, another small hiccup that will be ground into the dirt by the hooves of the herd in just a few day's time.  The bears will be kicked in the face once again and sent back into hibernation.  The bears on the other hand are trying to establish short positions near the top where their % gains will be maximized when it all collapses.  By doing a fast vee wave correction it sends hope into the bulls and fear into the bears.  Without these chances for hope, the bulls would all just sell at once and walk away. 

The recent vee wave retracement could have been the full 2nd wave but it also could have been A of C.  Bears should get ready to pile back short again this Monday when it becomes clear that the bulls have run out of steam (at least per the model below).  But when VIX hits about $50, the bears need to take stock of the situation.  If the shares scream past $50 on a big gap up then chances are reduced that this move will just be a B wave which will then finish the downward path to ~43.  But if they stall at the red triangle (about $50) then that would indicate that B wave is done and to look for C wave.  Of course, a break above $55.50 means that the 3rd wave is on.  But if you wait that long to get in then big percentage points will be missed.

If the moves to $50 is "loopy" or a bit meandering OR if it has a clear a-b-c pattern then it is likely to be a B wave.  But if it is strong and with gaps up then chances are it is wave 3 playing out and you DO want to be long TVIX or some other shorting fund when wave 3 plays out.

Even if the bull market is not over, EW principle says we are due a large C wave upward in these shorting ETFs.  So when 2 is done, bit it Monday or sometime next week, expect either a big C or 3rd wave up (markets down big time with gaps).