– The VIX has broken out above its Ending Diagonal inside a doubly indicated bullish Descending Wedge pattern on December 27. It has completed a Master Cycle low, beginning a new bullish cycle pattern for the VIX. The breakout has hardly been noticed by traders or the general public. However, it is poised for its next move to be a breakout above the descending wedge pattern and intermediate-term trend support/resistance at 27.03 to 27.74. At that point, the bullish phase is reestablished on the weekly trend as well as the daily.

SPX is in a pre-crash pattern…

– The /SPX “Santa rally” was repulsed again at the support/resistance line that has dominated the market since the March 16 low. The SPX has also closed below its 200 and moving average and its downtrend line (red) at 1258.84. Try as it might, the SPX has not been able to launch itself above this resistance area for the entire month of December. As a result, the SPX merely broke even for the entire calendar year.

From a cyclical perspective, the SPX is in a position similar to the August 2008 high.

… The NDX is on a sell signal at the start of 2012.

– The NDX was repulsed at its 50 day moving average at 2296.99 last week. On Friday it closed beneath its 200 day moving average at 2288.29 and below mid-cycle support/resistance at 2282.82, giving it a cyclical sell signal for the New Year. This week’s attempt at buying the dip has not pushed the NDX above its important resistance levels. The NDX also greets the year solidly below its downtrend line.

Folks, this is as bearish as it gets.

The Euro is below cyclical resistance.

– The Euro has begun its plunge towards parity with the dollar. After having crossed the Head and Shoulders neckline in cycle bottom support/resistance at 132.50, it has corrected only so far as cycle bottom resistance, and not back to the neckline. This shows acute weakness in the euro.

Since early May the Euro has had an increasing correlation to the Standard & Poor’s 500 index. There is a strong implication that as the Euro Zone crumbles, so will the financial markets in the United States as well.

The cycles suggest that the Euro may be on its way to parity with the dollar by the end of January.

The US Dollar has launched from its neckline.

– The US dollar made its trading cycle low on December 22 with a retest of the head and shoulders neckline on December 27. Since then it has made a breakout above its prior high and closed on Friday at its cycle top support at 80.18. We are now poised for the most aggressive portion of the dollar rally, where it could meet either of the targets listed above by the end of January.

While I have listed the minimum Head and Shoulders target of 87 on the chart, Head and Shoulders bottoms are quite powerful and may produce rallies as high as 20% or 30%.. (Source: Encyclopedia of Chart Patterns, by Thomas N. Bulkowski, page 276) The Broadening Bottom minimum gain nicely matches the potential target for the inverted Head and Shoulders pattern with an average 20% gain.

Gold breaks, then retests its new neckline.

– Gold descended below its massive Head and Shoulders neckline at 1570.00 on Wednesday. Then on Friday came back for a retest, closing beneath the neckline. In Elliott Wave parlance, gold is entering the “third of a third” wave. The last cyclical turn on December 21 happened to be an inversion, giving gold the go-ahead for a decline of another 30 days or more. Gold is now in its crash phase.

The breach of its Orthodox Broadening Top(http://books.google.com/books?id=wklriRw9a1oC&pg=PA155&lpg=PA155#v=onepage&q&f=false) trendline near 1450.00 is next. Some readers have questioned my use of the up-sloping Head and Shoulders neckline running from 1604.70 to 1667.10 as being too “aggressive.” The fact is, the Bearish Wedge just above the neckline carried the same message! This week both of those patterns reached their target. Most viewers should not fail to recognize the new massive Head and Shoulders neckline that was just breached this week. It is time to take the Orthodox Broadening Top and Head and Shoulders pattern seriously.

U.S. Bonds are above critical support.

– This week USB tested intermediate-term trend support at 142.61 and its broadening wedge trendline at 141.01. This may be the strong reversal that we have been waiting for. The cycles model called for a trading cycle low on Friday, December 23, which happened. Since then it has risen above its intermediate-term trend support and remains on a buy signal through the month of January.

I remain bullish, since the cycles support the uptrend through the end of January, if not later. In fact, the Broadening Wedge formation strongly suggests an acceleration in the price of USB.

Showdown between support and resistance in oil.

– West Texas Crude surged briefly to its downtrend line (red) but only briefly closed above 100.00 during the past week. This is the final resistance for oil, which now must turn bearish. It appears that traders and hedge funds probably met their bonus for the year end, but now it’s time to take profits. Book ‘em, Danno!

West Texas crude appears to be correlated with our domestic equities. That suggests that oil may be linked with stocks in a decline. It also appears that oil may be starting a crash pattern along with our domestic equities as early as next week.

China stocks retraced off the lows.

The Shanghai Index has broken down below its massive Head and Shoulders neckline at 2308.00. It appears to have made a trading cycle low on December 28. Therefore, the cycles suggest that there may be a bounce in the first week of the New Year in the Shanghai index. It is suggested that the Head and Shoulders neckline may be tested in the process. A failure at this juncture would be ominous.

The India Nifty index has broken below its neckline.

The India Nifty index retested its Head and Shoulders neckline in a trading cycle inversion on December 27. It has now resumed its decline to the head and shoulders minimum target of 3101.50. This two-year-old Head & Shoulders pattern appears very ominous for the Nifty.

The banking index has finished its retracement.

The BKX appears to have completed its long, drawn-out correction since early October. From the daily cyclical view, the BKX remains on a sell signal since February. On a short-term basis, a cross below intermediate-term trend support at 38.02 reconfirms that signal.

Normally when third waves are extended, fifth waves usually match the width of the triangle or the length of wave 1. In this case, however, a massive head and shoulders pattern is a dead giveaway that the banking index may plunge to single digits, if not to zero. In the meantime, what bankers that are still employed seem to be determined to get their final year end bonus. The market is about to recognize that this sector of the economy has been built on smoke and mirrors(http://video.cnbc.com/gallery/?video=3000065048).

Happy New Year!

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 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.

Related posts:

1. Weekend Update December 2, 2011
2. Weekend Update December 16, 2011
3. Weekend Update December 23, 2011
4. Weekend Update December 9, 2011
5. Weekend Update 9-9-2011