For the record, there is good reason why this should be viewed as dangerous if you see it: it means that the leveraged gamblers have to sell their good stuff like gold in order to pay the margin calls on the tons of bad "momo assets" that they have. This is the basic mechanics of the often quoted "throw the baby out with the bath water". Finance TV talks about this like people are just stupidly doing it and they get all upset that their supposedly safe asset class is taking a hit. Little do they understand that the seller has no choice, margin calls are unforgiving! Your broker will be happy to sell you out cheap (into his waiting arms of course) if you let yourself get over leveraged at the wrong time. The fund manager often has no say in it.
Still, while things on the surface look semi normal still, the weaklings just under the surface are falling like flies. For example, the recently reported fiasco at Austria's largest bank still has their shares falling, and what's worse, the chart tells me they have much further to tumble before catching a bid. The big gap down was only part of a 3rd wave which is still playing out. Then, since wave 2 was a vee, wave 4 will be sideways such as a triangle and then wave 5 will probably be the extended wave to bring this thing down to $5-$6 dollars before any hope of catching a bid.
Closer to home, GE appears to be done with its second wave "vee" type bounce (large blue 2) and is now apparently done with 1 of 3 and perhaps almost down with 2 of 3. If this is the correct model then we really must begin seeing some rapid downward movement soon.
Now,check out the following DIJA chart where some very interesting voodoo is taking place. Remember, the EW rules are always followed but the herd goes about them in as unusual and convoluted a way as possible at the major turns. This is to keep the wannabes out of the get rich quick club. What I am about to show is a controversial chart to say the least but I like my odds and I will explain the details reasons (i.e. has nothing to do with gut feeling) as to why I am presenting it.
First, the high level chart and model. Let me point out a few key things. First, the legacy TA (Technical Analysis) aspect. I believe that we have just experienced a confirmed head and shoulders breakdown on the DJIA. I am on record many, many times in this blog remembering that the head and shoulders was the predominant topping formation back in late 2007. They were literally all over the place. So much so that they almost completely went out of style. How many times do you recall me presenting a chart with a H+S on it in the past 3 years? Approximately never? Well, it seems that just changed!
The blue upsloping line in the DJIA chart is the neckline in this model. The action in the last days of June formed a left shoulder followed by a radical jump into the head and then a move back down to the neckline before tracing out the right shoulder (labeled blue 2).
That right shoulder broke down through the neckline dramatically and definitively. Afterward, the chart traced back up to the neckline from below but was not able to break back up. That was a failed test of the new resistance line. Following that, another move down and then today's move back up into what I label blue 4. That wave may or may not be fully formed yet. If so then I expect Monday to begin a rapid and scary sell off for the market in which TVIX could gain 30+% in a week. If blue 4 is not finished then it will likely finish early on Monday then then reverse as shown by the red model lines.
The pink lines show the target for the bottom of the H+S. In short, you measure the neckline at the tip of the head and then you add it to the neckline at the point where it breaks down below the neckline. The head-neckline distance is 7 chart units and so you can see where the initial target for that H+S is per this model.
Note the long upsloping black line which started mid April. The market knows that line exists and the market knows that it is important. If the sell off breaks below that line then the momo players will start jumping short. If we see a test, little bounce, and then hard break through as modeled below you can bet your sweet bippy that the worm has turned.
The H+S part was the easy part of this analysis. I am sure others are saying the same thing in professional trading houses. The part that is not so obvious but which ties in perfectly with the evidence is the expanding triangle marked by orange lines above and shown in more detail below. Each wave of the triangle must consist of a 3 wave move and we do see that in the chart below.
Before getting into it, don't be pushed back by the visual complexity! Click on the chart to receive it full size and then save it to your desktop and open it in window picture viewer if you have to.
Now, I want to say that that I have been wondering about that obvious early triangle that showed up in the chart shortly after I modeled an exact top in this post. It's pointed to by the pink arrow which is appropriate since I thought it so out of place when I first observed it. Triangles are always penultimate and there it was, a triangle, in what appeared to be the 2nd wave position. CRAP, thought I. So I stayed skittish, very skittish and I was not shy about saying that in my posts. Now you know the real reason why!
Still, when the chart could not make a higher high than the high of the triangle I started to wonder WTF this was going to turn out to be. This choppy shit is soooooo difficult to read in real time. But with a strong conviction about the count that led me to call a top, I decided to let it play out. Now that today's action has finished, I think I see what is going on: an expanding triangle is being used in the wave 1 position.Woah! This makes all the sense in the world and I have seen the expanding triangle used as a transition between high level trends before (albeit generally at bottoms instead of tops). The fact that the chart could not make a higher high than yesterday says two things:
- that down sloping top orange line needed to have about the same symmetry about the middle of the expanding wedge as the bottom line already had mandated to be in place.
- Not only could a higher high not be made, it resulted in a declining double top that is likely going to point to the wave 2 up resistance point. That weakness will be needed if the next move down is going to be the rather dramatic collapse that I show in the chart above.
Another indicator - my proprietary "triangle at the start of the last wave" indicator is in fact present at the start of C of 4. Blue 4 could be complete already or it could finish before noon on Monday but it has to finish very soon. A gap down Monday AM would set the stage for the very large sell off that should follow if a large, 300+ point sell off is to occur over the next 2 days. Or maybe Monday will be the start of the panic that I have long written would be telegraphed by a big 300-500 point sell off in a single day. I'm not counting on it but will not rule it out either.
Another thing: that black upsloping line is in the perfect position for the A of 5 wave down to test it. And breaking down below it will trigger the stops needed to fuel a run all the way to the bottom of the orange line and then do a little throw under.
If this plays out as stated, ESPECIALLY if you see the throw under after a C wave plays out via 5 sub waves, DON'T sit there and let the retracement into wave 2 take any of it back!! Let wave 2 do its a-b-c back up to that black line and then jump back in. We are talking significant percentage moves here with TVIX folks. If the waves are small then sometimes it doesn't pay to trade but on something like this, with all of this advance modeling you are getting, if the 5th wave of that expanding wedge does as I model then get the Hell out, sidestep wave 2 and then buy even more at lower prices! I think it will be ~25-30% gain to the bottom of the wedge and then give back half into wave 2. If you keep the 25+% and then get back in 10-15 % lower then you have made a very significant short term gain and your future % gains will thank you for this simple but effective move.
Another thing to consider: ending diagonals have been 3rd waves all over the place lately. That implies that there is a chance that TVIX's ending diagonal was only a 3rd wave and that the expanding wedge will be a 4th wave instead of wave 1 up. If that is the case then we could end up with a heavy retracement of all of these short term gains as TVIX forms an inverted owl into a failed 5th wave (blue path). We cannot rule this out! Remember, to date the mantra "buy the dip" has been a big winner for a lot of people. They will continue doing it until it bites them in the ass. Until the herd unilaterally becomes fearful, choppiness will be the name of the game. Can you imagine a nice move to $3.30 or so (the level of the prior 4th which just happens to coincide with a throwover of the top rail of the orange channel...) and then a smack down back to $2.75 so that you can have another dip into the honey jar at sub $3?? That would just make my freaking day and then some.
The other likely twist would be that the 5th wave down of the expanding wedge ends mid channel. That would be about $3.10-$3.15 for TVIX. Still a nice move from $2.87. I think that if that happens it is a sign of weakness which lends more credibility to the blue model. In other words, it suggests that the coming move is just the 4th wave of the prior trend and not the 1st wave of the new one. Then I would expect 5 waves down into a failed 5th leaving us with that inclining double bottom.
ODDS, not certainties folks, but I like my odds.
As usual very very insightful. Thanks Capt. MackaNZ
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