Just took my TVIX bet off the table...

In my recent post on TVIX, my model suggested that a bottom was in.  The price back then was $3.35.  Today it peaked at $3.96 and closed at $3.88.  It wasn't until just now that I had a chance to draw in some lines and realize that this is very possibly a first wave ending diagonal that completed a 5th wave throw over and then formed waves 1 and 2 back down to leave me with a declining double top. 

Now, normally I'm not so skeery and timid but I've got a pretty big bet going on this and am sitting on a quick 16% gain.  I'd like not to lose it even if only on paper for a day or two.  Ending diagonals are notorious for retracing nearly their full length and I have to keep in mind that this is the first real wave up after a long series of failed rallies.  I would not blame the market AT ALL for assuming this was just another failed rally in fear.  After all, the have all failed before and so the market will consider the trend to be its friend until the friend turns around and bites it.  

The only way to test it is to run stocks back up and see if there are any buyers.  During these early days of the reversal, percentage moves can be very quick.  So I sold all my TVIX in the after hours at $3.88.   I could easily end up regretting it but I have to go with the odds as I see them.  First off, a careful analysis of this chart shows:

1. a first wave up after a long string of losers
2. an ending diagonal 
3. wave 5 seems to clearly show a-b-c and c seems to be made up of 5 subwaves
4. there is a "unicorn spike" at the top. I have noted of late that this is a reversal signal and so I made up the name for it.  Please don't attribute it to me when talking about stocks with your friends  ;  )
5. the chart began back down and then left off at a perfect point for a gap down on Monday that would be used to turn the herd back out of the shares. 

NOTE: This chart happens to use extended market trading data in conjunction with trades from the normal trading day.  The count would have been slightly different if only normal trading day information had been used but the conclusion would be the same.

Here is a typical model for the double bottom that I pulled from a trading web site.  I will be looking for some kind of a-b-c back down to wave 2.

Again, the chart below includes data from extended trading hours.  I think it shows me that the 5th wave is complete with an a-b-c and that c was made up of 5 small wave that are pretty easy to "c".  3rds and c's generally exhibit the strongest Elliott wave rule adherence of any of the waves.

Note that my "to 3" showed worst case.  The pullback could, for example, touch the orange line and bounce.  The important thing is to see the 5-3-5, not some expected length.  What it must not do is put in a lower low.

One final piece of data that could provide a clue on the depth of the pullback should it occur is the chart of the DJIA itself.  Today it clearly broke down below the top rail of the ending diagonal and it did so in what I count to be the 3rd of a 5th.  But now I count that the first wave 1 down is complete and so we have to expect an a-b-c back up of some kind.  The question is, what kind?

• It could be an early morning dead cat bounce that quickly reverses (pop and drop).
• It could be the AM rally back up to the 38.2% fib before turning down before noon (I think this is most likely).
• It could go up and kiss the orange rail from below and then turn down (very bearish).
• Finally, it could take out the top rail again and then go build a set of Owl ears to create a declining double top.   This is the least likely to occur but you never know given the strength of this very long bull market.

Three things are really worth knowing:

1. If the orange line is breached with gusto, get out of TVIX and watch to see if the chart will form a higher high than the left ear.  If it subsequently breaks back below the orange line, get right back in because it would be very bearish for stocks.  A declining double top as shown by the declining grey line is NOT expected in this case but would be bearish for the DOW if it happened and then quickly broke back down.  But if it goes up there and then starts heading sideways, get out because that would be a flag formation leading to a new high.  One more time: I don't expect it but watching for it is part of the fear and discipline needed to win when using such high leverage like TVIX.
2. If a higher high is formed, you should already be on the sidelines.  In that case, we have to revisit everything very carefully.
3. If the chart pops up, kisses the upper rail from below and then collapses hard below the lower rail then the pressure on TVIX volatility is off to some degree because the ending diagonal will have been confirmed.  Its these first few days of the trend change that are so critical.  Of course if I weren't betting such a wad here I would be a lot less skittery because there are so many other factors happening right now that I know the markets are very close to a top even if this is not it.