Stocks worldwide have ended a miserable quarter. The plain fact is, there is more misery to come. Let’s take a look at one of the leading indicators of what may lie ahead of us.
– I have just updated the spreadsheets for the VIX cycles. It appears that they are on time and on target for their 13 year high which is due in early December. This by no means suggests that equities will reach a significant low at that time. This is the nature cycles. The VIX usually shows its peak at the Wave 3 or C of the Elliott Wave in equities. My equities cycles show a significant low in either February or April of next year. More on that later.
Today (Friday) is a turn date. I expect the VIX to rally strongly above its Broadening Bottom formation. The VIX is getting quite a bit of play among technicians nowadays, which I would expect in a Wave C.
–SPX retested its 34 day moving average at 1175 Thursday and it held. It was also a turn date for equities . By the end of September I expect to see SPX making new lows. The range and velocity of the moves in the SPX lately have been staggering. This can only end badly for the longs.
The next cycle bottom is due next Friday, October 7. SPX should at least be challenging the July 1, 2010 low by then. You can see the head shoulders minimum target is 997 once the neckline is broken, while the Orthodox broadening formation has a much lower target. It seems that Head and Shoulders formations complete in third waves as a general rule. Next week we are expecting waves iii, iv and v of wave (i) of 3. While there are no guarantees on the lower target, Broadening Tops have an average 64% success rate initially hitting the target. However they have a 96% success rate with declines ranging from 10% to 20%. (Source: Encyclopedia of Chart Patterns, by Thomas N. Bulkowski, page 56)
If you look closely at an hourly chart of the NDX, you will see yet another head and shoulders pattern with the neckline at 2155 (shared with the lower trendline of the Orthodox Broadening Top). The neckline was crossed at Friday’s close. Its target is 1973, which is just below the massive neckline of a complex Head & Shoulders pattern at 2034.92. All of this back and forth motion is producing multiple patterns and signals. This next week appears to be poised for a dizzying decline.
– Gold has completed its first wave down in what may be a significant decline. For the last two days it has been struggling below the lower trendline of its Orthodox Broadening Top. For that reason it may be assumed without too much difficulty that wave (ii) may be already finished.
The head And Shoulders pattern within the Broadening Top give us a clear warning that this pattern would complete. Gold is on a slightly different cycle pattern than equities. It appears that the next cycle bottom may occur on October 10. Could that be wave (iii)? I have not done my final calculations on target for wave (iii) yet, but my model suggests a potential target 1254 as a possible minimum target and certain Elliott Wave relationships suggest possible around 1050.
The dollar appears to have found support at the upper trendline of its Broadening Bottom formation. If that is so, we may expect a breakout above the new Head & Shoulders pattern next week.
The recent top in the dollar at 78.86 gives us a potential neckline of an inverted Head and Shoulders pattern with the closer target than the Broadening Bottom formation. However, I would not dismiss the broadening bottom target, since that is the 50% retracement of the dollar decline between 2002 and 2008.
– The euro is failing at 133.86 today I could write another neckline at this level, but the original head shoulders minimum target already produces an even lower neckline at 128.91. If it comes to pass, and fails at 128.91, we will see the euro at parity with the dollar before long.
– USB is rallying today, but not breaking out to new highs. I would like to reserve judgment on the final outcome of USB until we see either a break out to new highs or a breakdown below 140.00.
West Texas Crude has made a new head and shoulders pattern that lends meaning to the phrase, “When it first you don’t succeed try, try again.” I find it amusing that the second head and shoulders pattern has a target almost identical to the first. It also suggests an extended wave iii is about to begin.
Good Luck and good trading!
Anthony M. Cherniawski
The Practical Investor, LLC
P.O. Box 129, Holt, MI 48842
Office: (517) 699.1554
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