SPX and VIX Update: VIX Diverging from SPX, and a Look at the Big Picture

Still no material change in the counts since February 8.  The higher prices we've been expecting since then have finally arrived, and I believe that this standing target zone remains the bears' best chance for a meaningful correction, due to a number of factors:

1)  The wave structure now counts as a complete five-wave move at higher degree.
2)  The SPX has reached the 2011 highs, which should offer resistance and present a zone from which bears could attempt a counter-attack.
3)  Bullish sentiment has been extreme for 8 weeks.

There are also some new developments which add some confidence to the view that a correction or reversal may be nearby, but again I would warn that anticipating trend changes is the toughest, and most dangerous, gig in trading.   So take these developments as cautionary signals -- but until the trend lines break, they are only signals.  The trend is your friend... at least, it is until it beats you over the head with a blunt instrument and leaves you for dead in a back alley.

Last week, I talked about the potential that VIX could be in the process of bottoming, due to the VIX:VXV ratio, and this next chart lends further credence to that idea.  There is also a divergence forming between VIX and SPX -- VIX has been making higher lows while SPX has been making higher highs.  VIX usually leads SPX, as the chart shows, since VIX tends to be a "smart money" indicator.

Next is the 10-minute SPX chart, which suggests that a solid correction is due very soon.   I would still like to see the 2011 highs broken, and ideally see the 1376-1378 Fib zone reached, though it's not impossible that wave 5 is complete with Friday's high. 

I would again caution bears that while the current price zone offers good odds for a correction, if said correction does not materialize soon, the rally could stretch on for a lot longer than most bears are willing to consider. Long-time readers will recall that I gave similar warnings about the 1300-1310 zone.

Trying to be smarter than the market is almost always a losing stance. If the market signals strength by breaking decisively through the 2011 highs, then that must be respected; just as 1300-1310 turning from resistance into support was a signal that needed to be respected.

I'd also like to discuss a couple of big picture potentials.  I'm going to discuss the preferred counts and the permutations of those counts, and then at the end of this discussion, I'll summarize quite succinctly what my preferred view currently is -- so keep reading if you become confused.   

The preferred count considers that the SPX is in a (c)-wave rally.  The main question still in my mind is whether the fourth wave of this rally has already unfolded or not.  My preferred view is that it has not, which suggests that a correction is due soon, followed by new highs.  I'll simply need to see what the next decline looks like to aid in determining degree of trend.

 

As shown in red on the chart, my preferred view is that the red Minute Wave (iv) correction hasn't happened yet, which means red (iv)-down and red (v)-up still to come.  The big challenge is that until some type of meaningful correction ensues, it is very difficult to triangulate exactly where we are in this count.

The alternate count is in gray and shows the potential that wave (iv) has completed already.  If it's already completed, then the market is closer to an important top than I think it is -- but this remains my alternate count for the time being.

The next chart is the big picture, and has a very large target zone as a result of factoring in both the preferred and alternate counts into that zone.  If the wave (iv) correction has occurred, as shown by the alternate count in the previous chart, then we're in that target zone already, so the chart below reflects that.

Sometimes we can anticipate the market well into the future, but other times we can only see as far as the next bend.  Once a meaningful correction takes place, that will allow me to refine the longer-term target zones.

EDITOR'S NOTE:  The first black 1-2 of blue Wave (5) of red Primary 5 isn't labeled.  I think most readers can see where those labels are supposed to go, and it doesn't change the count at all -- just an oversight on my part when I ran out of the allotted number of Stockcharts annotations.

 
The next chart is a slight twist on the long-term count, and is currently my first alternate for the big picture.  I don't like this count as much for several reasons, the main being that I feel it "forces" the count a bit.  However, this alternate count would confuse and frustrate both bulls and bears alike, and that alone gives it some degree of appeal.  I also like that it retains the idea that this current rally is the third wave of a third wave (c-waves are also third waves), which certainly fits the character of the rally.

In conclusion, let's see if I can sum all this up in a way that minimizes reader confusion...  to aid in this goal, I'm only going to summarize my preferred count; the alternates have already been discussed.

Over the short-term, I'm anticipating that the market is due for a correction very soon.  Over the intermediate-term, I'm anticipating that this will be a fourth wave correction at minute degree, with higher prices still to come after that correction completes.  Over the long-term, I'm anticipating that after this rally unfolds in its entirety (potential time-frame would be May 2012 for completion of the entire rally), the 2008 lows will be revisited, and likely broken. 

In the meantime, the trend lines remain critical.  While this talk of corrections is based on well-informed speculation and historical precedent, it remains merely a potential unless the market validates it. Trade safe.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com