One of the most important TVIX updates this year

As you can see from this post, and to an even finer degree in this post, the early July bottom of TVIX and subsequent bounce into the $4s was clearly listed among the leading contenders for the next move.  Following that bounce, a big pullback in TVIX was far from unexpected.  In fact I would say that if you read this post and this post and this post that you would get the clear idea that it was always known to be a distinct possibility.

And so here we are.  The broader markets are clearly very spooky as demonstrated by the intra day reversal this morning but this has been a strong bounce so far, especially for the NASDAQ 100 which seems to have more effect on the TVIX price as the DJIA does.  Look how the NASDAQ 100 came within pennies of a new high today before the trap door opened!  The last high (which we are still modeling as the peak of the 2009 bull) hit 3997.60 and today the peak was ~3997.10.  Had today's NAS100 gone just 1 point higher it would have killed the top level model.  It still might even if the DJIA and S+P do not confirm it.  This would simply mean that the DJIA and S+P are 1 wave ahead of the NAS100.  Likewise, TVIX bottomed at $2.72, just 7 cents from the recent $2.65 low.  So at this point we still have an inclining double bottom on TVIX. 


TVIX has only two likely paths going forward as shown below.  It can either be that the ending diagonal that bottomed July 3rd was the 5th wave down and now TVIX is in a new bull market or it can be that that bottoming was only wave 3 down, the recent expanding wedge to $4.25 was wave 4 and now we are working on the last and final wave down that would, if this is the valid path, bottom around $2.00-$2.20.

I do not claim to know at this point which will pan out but I don't think there is a 3rd option.  So let me make the case for each and then end with a strategy for dealing with such extreme volatility.

Let's start with what is NOT my primary view right now which is that this is the 5th wave in progress.  Even though I don't think this is the right model, I always benefit from viewing the unbiased facts as carefully as I can.  That way when I see certain behaviors then I can recognize them and adjust more quickly.  Here are the points to be made for this case:

• The bottom into July 3rd was an ending diagonal/falling wedge and I have repeatedly mentioned in these pages that this has been how 3rd waves have been ending for some time now.
• These leveraged ETFs have a propensity to bottom in the low $2 range.  I have seen this time and time again over the years.
• A valid wave count might be that shown above in red.  This model assumes that the current action is only 4 of 5.  The 5th wave should be about the same length as the 1st wave when the 3rd is extended (as it certainly was in this model.  Note how the 3rd wave rolls downward just getting more and more scary.  Note how black 2 in this model was a sideways correction and how black 4 was a vee.
• So far, 1 and 3 are about the same length.  This means that the extended wave is being saved for the 5th wave in this model and it would be a great way to get capitulation out of the shorts.
• The wave action so far does look to have a triangular shape to it SO FAR and so that should at least give cause for reflection. If you see this bouncing up and down a few times on Monday instead of reversing strongly upwards, keep your finger on the sell button because it is likely tracing out the internal waves of a 4th.  That 5th, if it occurs, could temporarily evaporate 25-30% of your account value if you just sit there and take it!  If you are on margin you could easily get stopped out at the very bottom and left to rot in the sun by the markets.  This final bullet is the major factor in the strategy as you will see when I discuss that.
• The first pause in the plummeting was a sideways correction while the recent one was a vee.  That is alternation and it suggests a 2nd wave and a 4th wave respectively.

Now on to making the case for the primary model which is shown in red in the top chart of this post.

• Dow and S+P market internals look tired.  Access to these non-chart based factors is why I spend the $$ each month on EWI.  I can only see in one real time spectrum: the chart.  They on the other hand track many other spectra such as sentiment indicators including various oscillators, RSI, time between peaks and valleys, various arcane fib ratios and of course advance-decline ratio and the like.
• Refer to the first chart in this post again (above).  The first wave up of the new bull market in fear ended with an ending diagonal.  This is not typical of 4th waves and in fact I would call it unusual to say the least.  But for a first wave of a new bull market it would be right in line with expectations.
• TVIX could not make a lower low than $2.65 today which was the prior bottom.  Of course it could do so on Monday and that would be cause for an immediate sell while wave 5 of 5 plays out.  Until $2.65 is breached to the down side, I will be holding.
• The wave count, if it stopped falling here, would make a very nice a-b-c as shown below on the log scale.  Pretty much a straight shot down to A, a few triangular looking moves into B and then another straight plummet down to C.  On the log scale (which is really the only scale that counts), the C wave is actually just a tad longer than the A wave which is just how I like to see it.
• Double bottoms often are rounded on the left bottom and vee on the right which is the setup we have right now.

• SVXY which is the single inverse of the VIX filled the gap today (and perfectly so) which was clearly pointed out by the pink rectangle in this post.  
• While SVXY slightly surpassed the 61.8 on the way up before heading down, it carefully respected this technical level the whole time, much like a child not wishing to step on a crack in the sidewalk as you can see circled in the chart below, left in red.  That respect even lasted into the extended trading session.  After peaking, SVXY broke back down through the 61.8 like someone dropped a rock on it, eventually testing the 38.2% fib almost exactly before rallying back up to kiss the 61.8 again from below.  Look in the chart below, left, within the blue circle, how the end of that wave is rolling over to the right as if it is sensing an electrical force field there in the left hand chart (again which is slightly different than the right hand one because the left chart includes the extended trading session and the right one stops at the end of the normal trading session).
• The right hand chart shows that wave 2 was actually an ending diagonal that had a 5th wave throwover.  To me, this evidence and the gap filling by SVXY just discussed are powerful evidence that TVIX has bottomed.

Bottom line is that nobody knows what will happen in advance and we are just reading the tea leaves in order to determine the odds of a particular outcome and strategies to take based on something happening.  The first thing you need to know is this: if TVIX cannot hold $2.65 it is going much lower and you don't want to be around for it.  It will not stay down there long.  It will go take out all the stops and shake out all the weak hands and then come blasting back up.  So at the very very least, lose all margin shares if TVIX touches $2.64.  IF you are there to watch it, you can sell it all and then scoop it back up at a final 20+ % discount.  I loaded up to the gills with max margin in the AH trading today in anticipation of this being the bottom and a 3rd wave gap down.  TDAmeritrade allows 40% margin on your account value for TVIX:



I set my stops to flush all margin at $2.82 which is the low of what I am calling the bottom of wave 2.  If it goes to 2.64 the whole position will get liquidated and I will be looking for a lower entry point.

I have a king and a rook.  The markets have only a king left in this end game.  I have studied the game, carefully thought multiple moves ahead and have AUTOMATIC plans for whatever might happen.   I won't have to think on my feet, the orders are already in the system!

I am confident and focused and resolute but not cocky.  No matter what transpires on Monday, I am in a good place.  I hope this post finds you the same.