Market update: tomorrow is PIVOTAL.

Today was obviously not a good day for the Dow.  The common wisdom model mentioned in several recent posts including this one is within a stone's throw of being confirmed.  Since the threat today was that TVIX was in the process of doing an a-b-c back down as part of a larger triangle, a logical way to have done that would have been to fill the gap shown below (and talked about from the DJIA side in the link above) and then reverse to a lower low.

In fact, TVIX gapped up at the open but then peaked right at where the gap fill should take place.   This is where the expected B wave up would have ended and then 5 waves down would occur to form the C.  Seeing the loss of momentum there, I bailed out to see what would come next.  As the afternoon wore on, it was getting clear that a triangle was forming and so when it broke out the top rail I re-bought TVIX at a few cents cheaper and rode it into the close.

I believe that tomorrow and or Wed are going to see very heavy selling.  The chances of us seeing that expected 500 point down day on the DJIA are rising very rapidly. There are two ways it will likely happen:
1) DJIA just gaps down at the open and takes out the lower rail.  It just gets worse from there as selling slaps the crap out of every "buy the dipper".  If that happens, buy the gap up on TVIX and set very loose stops.  The loss of technical support for the broader markets would be extreme in that case leaving very little chance of of the bulls mounting any kind of recovery without some significant sell off playing out first.
2) DJIA does an AM a-b-c rally, reverses downward before 10am and then sells off hard. 

If you look at the wave structure from a high level, it seems like 5 waves up have transpired but this is a volatile ETF and none of the waves shown below appear to be extended (all are the same length).  While the ETF could do an a-b-c back down to ~$3.20 before reversing, I think that wave 5 is likely to extend (or worse).  It might just extend to kiss the top rail from below before pulling back to $3.20.

However there is another alternative and I am making it my top pick given how near we are to breaking down major support.  The market tries to be tricky in these cases in order that only the most worthy attackers get fed.  But the market must follow the EW rules and so we see things happen like what is shown below.  This is where we have 5 waves up in TVIX and the market watchers thus position themselves in order to take advantage of the expected a-b-c.  But in a 3rd of 3rd situation, the rules can become quite stretched.  While we would normally expect an a-b-c back to the prior 4th (~3.20), 5 waves up have already transpired from wave 5 of 4.   That means that blue 1 should be done.  So why did we see a slightly higher high after that?  Well, I suspect that the little pullback from the peak of blue 1 to blue 2 will count as the full a-b-c retracement.

If that is the case, then wave 1 of 3 up is already in place and so is wave 2 (see small green letters).  So now we are left overnight with the market sitting on a potential 3rd of 3rd up vs. a potential a-b-c retracement to the prior 4th.  Since I think that the red path will be taken tomorrow, I am holding TVIX overnight.

What I'm really saying here is that the state of the count is now such that the odds favor being less skittish.  Of course, I could be wrong!  But even if I am wrong about the gap up in TVIX (gap down in the broader markets) tomorrow, I will only likely have to suffer a pullback to $3.20 before a very strong reversal.  In fact, if we don't get a gap up at the open then it is likely the count below is wrong and so I might just sell at the open and then let the market set a clear direction.  But the gap up could be significant - 30 cents or more so I am now more worried about missing out on that than I am of a short term pullback.  This reduced skitishness could reverse quickly based on what actually plays out but if that lower rail goes down, skitishness should be put in a box on the shelf for some time to come.


When that lower rail is broken in the DJIA chart below, it's likely checkmate for the stock market: