This should be a very interesting test of EW [VXX]

I'm about to spew more crazy talk.  At least it might sound like crazy talk to many.  But I have to go with my interpretation of the charts because anything else is an emotional reaction.  Emotions and trading don't mix. So here goes.

VXX is the ETF which tries to track the VIX which is the volatility index.  I've explained it several times before so I will ask new readers to search the blog or Google it for more details.  However, you can really think of it as insurance against unexpected market moves.  Since everyone in the markets today is a leveraged long, this equates to crash insurance.

Most of the time insurance is a waste of money.  You buy a policy that lasts a year.  If something bad happens, it pays out asymmetrically.  If you don't use it, you lose it.  Example: say your home is insured against fire and that costs $1000 per year.  Each year in January you buy a 1 year policy and each year in December it expires worthless unless you have a claim.  You might own a home your whole life and never make a claim, thus losing 40 years of premiums.  But if your house burns down the payout is asymmetric and your $1000 payment returns $300k in claims for that year.  That is a 30 bagger for anyone who bought insurance on the very year that the house burned down.

VIX/VXX works the same way.  As a trader and not a buy and holder, I don't need insurance.  When I smell smoke in an investment I don't wait for the flames to show themselves; I dump it on the next bidder.  So my only purpose in buying VXX / UVXY is to buy insurance right before the fire breaks out and then to re-sell that insurance at a much higher price to those who failed to buy insurance at all.  Those running in late to buy insurance will pay almost any price under the right circumstances.

Obviously some kind of market timing mechanism is required for this kind of gambling and that is where EW comes in.

In this post I pointed out that, since the last VIX peak, 4 full waves down had transpired and 5 down was in progress.  The model chart below was provided in that post.  The key thing to know is that after 5 waves down the bounce target is the level of the prior 4th and for VXX that was $900.




Where exactly in that 5th wave was unknown for sure.  VXX was $48.52 at that time.  It recently bottomed at $15.50 and we know for a fact that VIX was heavily shorted at that time.  Below is the log scale zoom in of just black 5 (unlabeled but assumed in the model above) from mid 2011 until now.  Note how this model predicted that when the turn finally came, it would be of a sudden.

We might not likely have 5 waves up in VXX yet; only 1-2-3 and 4 seem present in the chart below.  But if one more wave up happens then it is going to be the signal that the worm has turned and that fear has re-entered the markets.  Risk off if you will.

This chart is going to be very volatile and scary for traders but I think the best strategy is to buy a dip and not a peak and then, once you are no longer getting stopped out, just hold this at least until blue 4 so that we can assess the wave count of the rally. 

Bottom line is that this model says that it's time to buy fire insurance on the next dip.  I plan on just leaving a small core "hail Mary" position in UVXY (already purchased in the $25 range as part of my recent bottoming call on UVXY) and then trading the wave count with a much larger position.





So for newcomers, why is my opinion worth listening to in the slightest?  I's a damned fine question!  After all, I am just an engineer in high tech.  Elliott wave analysis is a hobby,  I've never been on CNBC nor debated Jim Cramer outside of these pages (To be fair, I've never lost to him in these matches).  Janet Yellen does not listen to my economic council.  So why should you?

The truth is that you should not follow me.  AT ALL.  Why put your faith in another man?  Are we not all fallible?  Are we not all subject to the same herding instincts?  Yes we are even if I try to make it my daily business to recognize and avoid such behavior in myself when I can detect it.  But ants think they are individuals and so do honey bees.  Yet all of their behavior is directed by their societal norms and anyone who does not conform is pushed away.  So I strongly suggest that you do not listen to me or follow me in any way because I am as infected with herding instincts as anyone else.

The charts, however, are a different thing.  While they can be misinterpreted and temporarily distorted (and often are) they are never wrong.  So look at the charts I provide and then look at the results they can deliver.  It's the charts you should trust, not me.   I'm just the observer and commentator.  When the charts speak to you, listen.  For example, based on nothing more than the UVXY chart I called a likely bottom on the 15th in this post.  In this post from the 19th I wrote, "the UVXY chart is beginning to show signs of life which appear be coinciding with the DJIA testing its lower support rail. Because of this I doubled down on UVXY into the close and got filled at $26.60.  My count is below.  IF this count is right, and I would call it a 90% odds probability of it being correct, the stock markets will gap down at the open tomorrow and then pick up speed to the downside into the end of the week.  There has never been a better time to own UVXY IMO..."

That was written at approximately the location of the red arrow on the DJIA chart below.  Since then we either got 5 down OR 3 down, and now likely finished with the 4th.  Either way I see more downside for the DJIA next week.  Importantly, it has little to do with my opinion and much to do with the data which is coming off the herd itself.