– The VIX broke above its Ending Diagonal formation and has closed above its upper trendline, but below the 10-week moving average at 20.24. This leaves the VIX ready to surge above the 10 week moving average and its mid-cycle support/resistance line at 23.04 in the next day or two. It appears that the VIX will either challenge the overhead Head and Shoulders neckline at 48.00, or exceed it in the move it has just begun. This could happen in the following week.
SPX nearing the top of its cycle range.
– The SPX closed higher this week in an effort to better its prior high of May 2, 2011. The top of its cycle range is 1392.75, but an imminent cycle turn date is February 19, so the jury is out whether it breaks out to a new high before reversing back down. A decline below its 10-week moving average at 1299.00 will turn many traders bearish and confirm the reversal of trend. I have left the outline of the Orthodox Broadening Top on the SPX, since it is approaching point 5 in the formation (see link below the NDX chart). A failed point 5 raises the odds of a decline to point 6 below the lower trendline to an 80% probability.
Any further decline below the weekly mid-cycle support at 1210.30 raises the probability that the SPX may not find a bottom until it reaches Cycle Bottom support at 1027.86. This raises the probability of a crash scenario much like the 20% decline into the August 9, 2011 low.
The NDX closes at the top of its Orthodox Broadening Top.
– The NDX closed at the top of its Orthodox Broadening Top (http://books.google.com/books?id=wklriRw9a1oC&pg=PA155&lpg=PA155&dq=orthodox+broadening+top&source#v=onepage&q=orthodox%20broadening%20top&f=false) and its weekly Cycle Top resistance in a pre-crash formation. The cyclical model suggests a minimum decline to mid-cycle support at 2139.68, but if it is exceeded, then the 1697.41 cycle bottom is to be expected as the target of this decline. This would complete point 6 of the Orthodox Broadening Top. We are seeing a repetition of the technical conditions that were evident prior to the Flash Crash in 2010. This suggests a very quick, sharp decline that may be the final setup for the Orthodox Broadening Top.
The Euro falls back from its neckline.
– After another retest of its Head & Shoulder neckline, the Euro traded lower. The Trading Cycle high arrived on February 9. Since then, it tested its 10-week moving average at 130.01, then made a minor retracement. A drop below the 10-week moving average may alter any hopes of a Euro recovery in the trading pits. The next level of potential support is the Cycle Bottom support at 123.15.
While the European Union works toward a second bailout(http://www.bloomberg.com/news/2012-02-19/euro-region-ministers-circle-in-on-greek-rescue-as-crisis-disputes-linger.html) of Greece, one wonders what a second bailout would do that the first bailout failed (http://www.zerohedge.com/news/greek-headline-reality-check) to do…and who is being bailed out? Certainly the banks and not the Greek people are the chief beneficiaries.
The US Dollar lingers at support of the Triangle trendline.
– The US dollar retested its lower triangle trendline at 78.40 this week. It also found support at mid-cycle support at 78.90, which gives it a buy signal. Confirmation of the buy signal is achieved once it rallies above its 10-week moving average at 79.96. The probable flash dash (panic rally) that may occur over the next two weeks may not only take the dollar out of the triangle, but in all likelihood may also breakout to a new five-year high. This move will leave what’s left of the dollar carry trade in ruins.
Gold remains above trendline support.
– Gold closed above its 3 year trendline support at 1720.00. A cross below 1720 breaks the uptrend line for gold and leaves its next support at 1540, its Head & Shoulders neckline. From a cyclical point of view, the immediate target for gold is mid-cycle support at 1412.00. However, a cross of the neckline may put the cycle bottom support at 969.95 in play.
Since gold is already completed its right shoulder of its Head & Shoulders formation, it may not hesitate at the neckline. Instead, it may decline to mid-cycle support at a minimum before it may find the next support level.
U.S. Bonds lose their near-term support.
– USB has failed to maintain its value above the 10-week moving average at 142.37 and appears ready to break a shallow Head & Shoulders neckline at 140.18. Should it continue below its prior low at 140.18, then it may be assumed that USB will decline further into its Master Cycle low due March 15. The minimum target for this decline appears to be 134.00, its Head & shoulders target, but it is more likely to find support further down at weekly mid-cycle support at 128.05.
Crude takes aim for its cycle top.
– West Texas Crude took aim for its Cycle Top resistance at 109.29 last week. It appears to be the final fling of its current push for its high, since its cycle turn is due this weekend. It is not certain whether the top at 109.29 will be reached. The reversal is confirmed at the 10-week moving average at 99.31. The next potential bounce may be at mid-cycle support at 88.12.
Generally Head & Shoulder necklines offer little or no support after the right shoulder is complete, so it appears that crude may trigger the Head & Shoulders formation in this decline.
China stocks linger a fifth week at the neckline.
The Shanghai Index continues to linger at its neckline at the close on Friday. The sideways consolidation is bearish for the Shanghai Index. It indicates that the prior move will resume, but its appears that it may be waiting for the Japanese, European or U.S. markets to decline in unison.
The India Nifty completes a sharp correction.
The India Nifty rally finally stalled near the top of its Weekly Cycle Top resistance. This rally far outpaced the rallies of the other Far East indexes. In fact, the rally appears substantial enough to indicate that the CNX Nifty may be changing its longer-term trend. If the forthcoming decline descends below the neckline, then the Elliott Wave pattern on the chart is correct. However, should it stay above the neckline, then a potential new uptrend may have begun. We may have our answer by early April.
The banking index probes the tip of the diagonal.
The BKX probed higher, meeting the upper trendloine of its Ending Diagonal pattern on Friday. A drop below its diagonal trendline at 44.30 may signal the reversal is in progress, while its 10-week moving average at 42.36 may confirm the reversal in trend.
If the Head & Shoulders pattern is correct, the magnitude of this decline will be enormous. The cycles suggest that the top was completed on Friday or may extend to early this week. The intial decline may take place in two weeks or less.
Regards,
Tony
Anthony M. Cherniawski
The Practical Investor, LLC
P.O. Box 129, Holt, MI 48842
www.thepracticalinvestor.com
Office: (517) 699.1554
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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.
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