— The VIX is now challenging its 40-week support/resistance line at 17.22 after making a Master Cycle low three weeks ago. The 40-week support/resistance line is the defining spot in the weekly chart when a change of trend may be determined. Once that level is achieved, the VIX may move higher in a very dramatic fashion.
SPX is ready to begin its crash fractal.
— SPX closed above its 10-week moving average at 1408.46. On the weekly charts, the crash begins beneath the 40-day moving average at 1389.55. Further confirmation of the bearish outlook occurs at the trendline of the Broadening Wedge near 1360.00. My Cycles Model suggests that the panic may begin within the next week, but with a panic low that may exceed most expectations. I have been saying this for some time, and acknowledge that this is the most dangerous and difficult formations to call.
(ZeroHedge) As Morgan Stanley notes, 77% of US investors are now bullish on US equities – near record highs – and if, like us, you prefer positioning (as opposed to sentiment) data, the net longs in S&P 500 futures are as high as they were in 2007 (right before the peak) and in late 2008 (right before the 27% plunge in the first quarter of 2009). But apart from that…
NDX continues to decline beneath its death cross.
–The NDX continued its decline beneath its 10-week moving average at 2642.43 and its 40-week moving average at 2672.38. There is nothing bullish about this chart. The moving averages have made what is often called a death cross, confirming that the decline now has legs to move quickly and decisively. Final confirmation occurs at its mid-Cycle support and Broadening Wedge trigger at 2438.70. What is more, there are no further supports beneath mid-Cycle support until it has reached its Broadening Wedge average target below Cycle Bottom support at 2021.19.
Yet another confirming formation with an even deeper potential target has now appeared, called the (inverted) Cup with Handle Formations (in black). It becomes active beneath 2494.00, the prior low on November 16.
The Euro makes a final sweep of the shorts.
— This week the Euro made a new retracement high as it attempts to defend itself against massive short positions owned by hedge funds. The expected drop beneath 120.00 would have the effect of wiping out many European banks whose collateral consists of European sovereign bonds, while enriching the shorts. This weekend is the final pivot high in the Eurozone. Both Elliott Wave and the Cycles have been calling for an Intermediate Wave  decline into mid-January. The decline in the Euro will also have the effect of accelerating the decline in the US stock indexes as well..
The US Dollar extends the retracement.
— USD broke through support at its 10-week moving average at 80.26 this week, stopping above the triangle trendline. It has a waiting inverted Head & Shoulders neckline at 83.80. The potential right shoulder of the inverted Head & Shoulders appears finished, though it is shorter than the left shoulder. Because this pattern is not apparent in the daily charts, there is very little awareness of it and the ramifications of a powerful new trend in the Dollar.
The cycle decline has extended, but not excessively. This weekend may see the turn in the US Dollar that may catch investors by surprise.
Gold in week 3 of its crash fractal.
— Gold has closed a third week beneath its 10-week moving average at 1718.52. Final proof of a crash formation may be the cross below its 40-week moving average and the (crash) trigger point of its Orthodox Broadening Top at 1665.05. The next step in within the Orthodox Broadening Top pattern is that it goes into panic mode. There are three weeks left in this cyclical decline and usually the decline speeds up as the decline progresses. Part of the reason for the delay in the decline is the strong relationship between the Gold Cycle and the Euro Cycle. A strong reversal in the Euro may accelerate the declining pattern in gold.
Treasuries appear to have lost 10-week support.
— USB declined beneath its 10-week support at 148.93. The decline may not be over and 40-week support is just beneath at 146.95. This has not been a good week for the Long Bond. Ending Diagonals are usually completely retraced, suggesting a decline below its 31-year trendline and a target near Cycle Bottom support at 115.99. This forecasts a massive technical breakdown. A decline beneath the 40-week moving average may spark the first flash crash in bonds, which nobody is expecting.
Crude remains beneath its 10-week moving average.
— West Texas Intermediate Crude remained beneath its 10-week moving average at 87.60 this week. This leaves the door open for a decline beneath its Complex Head & Shoulders neckline at 78.00. WTIC has consistently closed beneath its 10-week moving average for the past 4 months and the 10-week, in turn has remained beneath the 40-week moving average since April. This chart shows demand destruction on a massive scale.
China stocks are breaking out.
The Shanghai index has vaulted higher this week, exceeding its prior 4 month highs. This is a retracement rally, but it should be a strong one. It appears to have begun a very strong Primary Wave [C], possibly as far as the top of the Cyclical band.
(Bloomberg) China’s manufacturing is expanding at a faster pace this month, suggesting the factory recovery in the world’s second-biggest economy may withstand a slowdown in exports. The December preliminary reading was 50.9 for a purchasing managers’ index released today by HSBC Holdings Plc and Markit Economics. That compares with the 50.8 median estimate in a Bloomberg News survey of 12 economists and a final reading of 50.5 for November, the first time in 13 months it was above the expansion-contraction dividing line of 50.
The India Nifty pauses at the top.
The India Nifty appears to have completed its Cycle Wave II high. This is a massive formation that has remained above 4500 for the last 3 years. The most prominent formation is the Cup with Handle formation, which is now evident. A decline from here would be caastrophic, since there is virtually no support until it reaches its March 2009 low.
The Bank Index makes a spike top.
— BKX managed to close just above its 10-week moving average at 49.14. That doesn’t mean that the bank index won’t fall hard when the Euro plummets. What is not apparent in the weekly chart is that the banking index has made its Trading Cycle high on December 12, just 26 days from its November 16 low and it has ample time to decline into its Trading Cycle low in mid-January. The panic may begin at any time now. I know I have been saying this for a long time, but this formation is prone to extensions, making it one of the most dangerous bearish formations ever written about.
The extended correction now puts an even more bearish Cup with Handle in play. The uptrend appears to be over in BKX. Now for a nosedive below supports and a downward acceleration into a full-fledged panic.
(oftwominds.com) Denial doesn’t change reality. It only cripples our response to reality.
Psychologists and behavioral economists have found that we deceive ourselves (conceal the truth) to serve our own interests. Perhaps this is why the mainstream ignores the Id Monsters in the shadows: shadow banking, shadow housing inventory and shadow liabilities.
We end on that note.
Anthony M. Cherniawski
The Practical Investor, LLC
P.O. Box 129, Holt, MI 48842
Office: (517) 699.1554
Fax: (517) 699.1558
Disclaimer: Nothing in this email 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.
The use of web-linked articles is meant to be informational in nature. It is not intended as an endorsement of their content and does not necessarily reflect the opinion of Anthony M. Cherniawski or The Practical Investor, LLC.