[DJIA] [UVXY] update

At the DJIA backlink I provided the model below.



Not too much changed today in terms of the model because DJIA did not create a higher high than that of March 25th.  The updated count of the final wave of this model is shown below.  If this model is going to be correct, we really need to see DJIA begin to sell off very soon: 1-2 trading days tops.

Three models are presented below for the very near term.  In the green model, breakdown begins tomorrow and we know it is upon us by a break down through the lower rail.

In the red model, we kiss the lower rail and then have one more failed attempt at a higher high as shown.  In the blue model we kiss the lower rail and then break out to the upside.  There is nothing on the chart which hints to me at which it will be but I bought back into UVXY at the close simply because it was down 4% even though DJIA, $COMPX and S+P all closed red.  This is the kind of divergence that one sees near a trend change.  It is not any kind of hard or fast rule, just an observation.  So I bought back in at $10.57 during extended trade.  

If things don't go my way tomorrow I will be quick to sell UVXY again because we all know how devastating capitulation sell offs can become.  Keep in mind that I did understand that UVXY could likely end up where it currently is and I documented it in several posts like this one.

In cases like this it always pays to think about what the worst case scenario will likely be for your trade.  Of course in this case, that is the blue path above which eventually leads to the red path below.  Notice the blue number labels suggest that we are in the late stages of blue 5.  While that might sound dandy, check out the size of the blue vertical that spans $34 down to $23.  If that is blue 1, and if blue 3 was the extended wave (which it was), then EW says wave blue 5 could be about the same size as blue 1.  If that is the case then the target is $8 which is ~25% drop from current levels.  25% is nothing to sneeze at even if it only dipped down momentarily and then came back up (like blue 4 did in reverse).

Now, applying this same guideline to just the blue 5 wave, the red vertical measures the height of wave 1 down.  Assuming today was the bottom of 3 of 5 and that we get an a-b-c to kiss the lower rail of the falling wedge tomorrow, then we could see a lower low in the $7 range.  If you see that I think it is a major buy signal with a likely move back up to at least $20 built into it.  But it would also be a temporary loss of ~40% from current levels which I would like to try to sidestep.

I also think this is a good time to discuss the so called fundamentals of these moves.  Long time reader "TJ" is obviously smart, obviously well informed on the markets and as a comment to this post which had the model below showing an EW count which implied that a big UVXY drop was likely ahead he wrote:
"I read your post on DJIA and UVXY. Although I don't have any basis to disagree on the direction of the EW moves, I disagree with you on the size of the move in UVXY relative to DJIA. If the DJIA owl ears blue path plays out, the bearishness in UVXY to $10 is relatively extreme. From a structural point of view, the front to second month VIX futures term structure is at 10% contango. This implies a roll yield of -0.5% per day assuming 20 trading days in a month. For UVXY, it means a 1% decay in price per day until expiration, all else equal. Assuming owl ears take 5-7 days to play out, I expect UVXY to drop, 7% from contango alone. Additionally, the spot VIX should drop back to 12.50-13 range (strong support). This would cause contango to widen, so add another 3-6%. The other effect is that the VIX futures will fall along with spot VIX. If spot VIX drop to 12.50 (I.e about a 17% move), futures should drop 7-10% based on past experience, implying an additional 14-20% for UVXY. All summed up, I expect a down move of 24-33% (to $13-$14) in UVXY IFF DJIA develops owl ears in 7 days. Any longer and UVXY keeps going down due to very large contango headwind.

I didn't want to get all technical on you, but trying to reconcile with your expectations as given the current term structure with potential for large down moves in equities, it can become costly in terms of missed gain opportunity or outright losses from bad timing into UVXY entry."

The heart of my response was:
"I don't doubt that you know your technical stuff but I do doubt that you know (or anyone knows) all of the factors involved, especially in the short term. If such evaluations actually produced repeatable reliable results over time then nobody would rely on TA. For all I know the federal reserve is buying puts on VIX in order to try to bend the herd to its will. A little bit of money buys a lot of leverage for a big player like the fed. I did not see this factored into your analysis.

This is the difference between TA and fundamental analysis. When there is no chart data, fundamentals are all you have to go on."


So now with the benefit of hindsight we see once again that so called fundamental analysis isn't very reliable.  The problem, as I have stated before, is that the true fundamentals DO matter but they are unknown and I believe unknowable by mortal man.  Someone's view of what the fundamentals are at a given time might sound good while completely missing the real short term drivers of the shares.  So I continue to maintain that the best way to make money in the markets is to NOT invest until you see an entry point supported by some kind of EW wave count and then to use said count to define stop loss points.  In this way you expose yourself to upside without exposing yourself to undue downside.  If you do this long enough you will eventually catch enough upside breaks that your profits overwhelm your ante losses in this this big game of online gambling that we laughably call "investing".