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SPX and VIX Updates: The Market Weighs Its Options After a Rally to Nowhere


The next couple months for SPX is hard to predict -- as with all market tops. But Elliott Wave Theory, and a look at the Volatility Index, can give us some good clues.

If Shakespeare were a stock trader, he might say the market since August has been "full of sound and fury, signifying nothing."

Despite a fair amount of bullishness from the mainstream media, all this rally has accomplished so far is a trip back to the top of the recent trading range, as shown in the chart below. This chart also shows my preferred view of the approximate path likely to be taken by the S&P 500 (SPX) into December:

Click to enlarge

I am of the opinion that this rally will eventually break out of that range, at least for a few weeks or so, but I think it's likely we head a bit lower first.

I always use the market action and price as my most important indicators, but there is another indicator that's worth mentioning at this juncture. The Volatility Index (^VIX) has been trading in a range since August, similar to the SPX; and, also similar to the SPX, it recently whipsawed out of that range and immediately back into it. Whipsaws often lead to strong moves in the opposite direction (see the recent rally). If the VIX continues rising here, that would be bearish for stocks. I'm not suggesting the VIX will return all the way to the top of its range -- however, if it did, that would obviously have very bearish implications for the broad market.

In recent sessions, the VIX has been rising even though the SPX has been trading sideways-to-higher; this behaviour in itself is generally considered a bearish sign for stocks, and often signals lower prices are around the corner.

Click to enlarge

Finally, the short-term wave counts are starting to come to light. In the case of tops, much moreso than bottoms, it can be difficult to nail the exact turn. Especially when the larger preceding waves were sideways and open to several interpretations, as has been the case since August.

Nevertheless, the market has finally revealed enough structure to allow me to narrow my counts to the three most likely possibilities. Of those three, two of the counts are apparent, and one is speculative -- and the speculative count is one we should be able to confirm or rule out fairly quickly.

The chart below portrays the two most apparent counts, and their most likely resolutions. I have simplified the labeling to show only the ending points of the larger waves, ostensibly to make it easier for viewers to follow (but in reality, largely because I accidentally deleted my more detailed chart!).

The preferred count is shown in red, and argues that Wave A completed its top on Tuesday, and is now in the process of correcting down toward the 1125 zone.
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No positions in stocks mentioned.
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