Good evening, Friends of The Practical Investor.

The sideways movement in the indexes since August 9 have many traders getting bullish again.   I am not.   A look at the following charts will give some clues for my mistrust of the markets.

One of the indexes that I am bullish on is the Volatility Index.

The VIX appears to be wrapping up a very deep retracement which may constitute a right shoulder of an inverted Head & Shoulders pattern. The minimum target for the VIX is 63.60, which is not very far from the target indicated by the Broadening Bottom formation. Both formations have a very high success level, so having two side-by-side formations may add to my confidence in the targets for this cyclical rally.  I have also been warning that the VIX is due for a 13-year cycle high in the month of November or early December.

Last week I mentioned a Cycle Turn date of October 8. Since it occurred on the weekend, it has a very high probability of turning higher inthe next day or two.

 

The SPX (cash market) closed near its 78.6% maximum retracement at 1197.00 today. There is a natural resistance at 1198, that, should the SPX go higher, would indicate that this rally is more than a retracement. However, you can see that all of the recent retracements have gone to extremes, due to the large amount of liquidity sloshing around in the markets.

What is helping my sanity with these extreme moves is that the Primary Cycle, which often corresponds with third waves, is ready to begin. It is not due to end until early November. In the most recent decline, the SPX dropped 10% in 4 days. How much do you think it is capable of declining in the next 17-18 days?

 

The NDX is back-testing its bearish wedge trendline and its 172-day cycle mean at 2291.64. It has also formed a right shoulder that is nearly the same distance from its low as the left shoulder is at 2268.00. Although there is a lot of volatility shown in this chart, there is also a considerable amount of order and proportionality. The closing value is very near the 78.6% retracement value that I had indicated earlier to members of TPI.

The Banking Index managed to rally 15% from last week’s low. They are desparately attempting to appear that “all is well.” JPM and MS are both at their 34-day moving average, while MA, GS and BAC are at their 17-day moving averages (thanks to Doug Wakefield for ths info). Bank earnings start with JPM on Thursday along with the weekly unemployment report. Somehow they seem to go together.

 

Just to show you how bearish the BKX is, a spike below 32.54 may trigger a massive Head & Shoulders pattern with a MINIMUM target of 6.29. This raises the possiblility of a near 90% wipeout of bank stock equity by the end of October. That also raises the probability of the nationalization of one or more of our (US) major banks and possibly the largest decline in the banking indexs in recorded history.

I cannot help but mention a bank ETF, XLF, which has a downside target of 4..87 from its Head & Shoulders pattern. Since this is only a third wave, it suggests that our largest banks may be onlife support by the end of this year.

 

The US Dollar made a 39% retracement to 77.35 and trendline support. of its Broadening Bottom formation.  The outlook is bullish, with a 94% prprobability of reaching its Head & Shoulders target of 87, once it rises above its neckline at 79.84.  Ignore the neckline crossing at your peril!

The Euro displays a rare wave 2 triangle that I have never seen before.  I am certain that it has fooled many traders into believing that it would go higher, not lower.  It may also have had a less rare Head & Shoulders target failure, since it was targeted to decline to 128.60.  Today’s pattern high shows that the Euro is a mimic of the SPX.  I also expect to see the Euro decline for the next four weeks.

It is hard to tell whether gold has ended its rally today or will it extend for just a little while longer.  It has made a little less than a 38.2% retracement from its prior low.  Gold  is on a different cycle than the equities cycle and must be visualized separately from stocks.  However, it has the probability of declining at least to the end of October.  Should it decline below its Broadening Top trendline at 1620, it has a very high probability of continuing its decline to an average near 1250.00.

The long bond appears to have made both a Cyclical and Elliott Wave reversal and may continue its decline into the end of October, where an important Cyclical low awaits.  An initial target awaits at  127.32.  There are no discernible patterns to trade from yet, but the Cyclical model often points to important levels of support and resistance.

One note of caution.  The USB has only retraced 26% of its most recent rally, so we should be alert for a bounce that may indicate a reversal instead of a continued decline.

Good luck and good trading!

Tony

Anthony M. Cherniawski

The Practical Investor, LLC

P.O. Box 129, Holt, MI 48842

www.thepracticalinvestor.com

Office: (517) 699.1554

Fax: (517) 699.1558

 

Disclaimer : Nothing in this email/blog should be construed as a personal recommendation to buy, hold or sell short any security. The Practical Investor, LLC (TPI) may provide a status report of certain indexes or their proxies using a proprietary model. At no time shall a reader be justified in inferring that personal investment advice is intended. Investing carries certain risks of losses and leveraged products and futures may be especially volatile. Information provided by TPI is expressed in good faith, but is not guaranteed. A perfect market service does not exist. Long-term success in the market demands recognition that error and uncertainty are a part of any effort to assess the probable outcome of any given investment. Please consult your financial advisor to explain all risks before making any investment decision. It is not possible to invest in any index.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Related posts:

1. Weekend Update: Prepare for the Worst October in Stock Market History