Prediction: The market will experience a 38.2% retracement of 2009 lows around 12/07/12 as the 20 week EMA passes through the descending wedge trend line on the chart. This will take SPY to roughly 115 to 120 level. The market should make a short lived temporary bounce at 23.6% (128.7) retracement during the correction, but will quickly continue on to it's final destination around 117. VIX will spike to 45-50. People will talk about similarities to 2008, but this should have more similarity in structure to August 2011.

Background information:  My suspicion of a VIX spike / disorderly correction, came about 3 months ago when I noticed that from each major VIX spike since the collapse in 2008 a pattern developed that a subspike (over 25 spike, but short-lived with relatively low damage to SPY) would occur a certain point. If you were to take the time from the first spike to the subspike and cut it in half and tack it on to the subspike, then a new VIX spike would occur that week in the future. It's strange to think that fear spikes can be timed, but I do believe they can be to a large degree.

Most of trader's minds are still fresh with pain from the 2008 disaster and even from 2000 dot-com / tech burst. As we approach the 150 level in the SPY market, you cannot help but notice that so far nothing good came from that level thus far, and that general territory warrants further analysis. 

SET-UP: The set-up so far is very much that of the May 2010 Flash Crash and the August 2011 Crash as far as VIX is concerned. As you can see from the second chart, we are in the third wave of a bull cycle since 2009. The 90's Bull and 00's Bull Cycles had three stages, which Charles Dow defined as oversold, fair market, and overbought cycles. He puts it a little more elegantly than that, but it is easy to see the market psychology in each of those cycles play out since the bottom in '09. We are in the third cycle now, which should make sense. The whole cycle has done nothing but climbed a wall of worry.  It goes up simply because momentum has not exhausted. There is no really good news out there, there is just less bad. We are overpriced, everyone knows it, but since the market just goes up, who are we to stop it, so we rationalize it. If you don't believe this is the sentiment, why is VIX at 15 with all the world's problems including the US's knocking on the door. People are just tired of losing money in puts and shorts, because the market seems like a juggernaut. But, this market is no different than any other, and that momentum is showing signs of weakening.

Why this is not 2008 despite the SPY level: The entire year leading up to 2008 was turbulent and VIX lived for quite a while above 20 and 25 leading up to the crash. Both SPY and VIX leading up the crashes in 2000 and 2008 had wild swings up and some down too, which have not been observed here. The pattern simply best matches the other more recent 38.2% corrections much better. Additionally it has only been four and a half years since the last major crash, and usually they come once a decade roughly.
If I am wrong though, and this were to explode into a 2008 style disaster, it would be truly be worse than 2008 as we would have the classic head and shoulders completed, and we could expect to descend in a similar fashion as we ascended through the whole 1990's. It would likely mean the end of the equities system as we have known it in our lifetimes. So for the record, I do not expect that.

Implications: Obviously, first and foremost, protect yourself short term. I can't tell you if we will have a classic T.A. top-off or if it will just go one day on a news related item that is hard to time.
Second: This means the market has a real shot at breaking this 150 level curse on potentially the next pass up. SPY may not make it too much further than that though, since SPY tops do appear to be tapering off logarithmically and this will not be the start of a new bull cycle, but a rare fourth wave on an old bull. This is actually good news for the country outlook though. Higher highs each time. 

Timing: As we have made mention and you can see in the SPY and VIX charts, near the top, things usually get a little hectic and momentum carries price a little further than it should. T.A. can sometimes get stretched a little, as overbought becomes more overbought. This is why so many people get suckered in to bull. It's hard to time bear moves before the cliff as the Bull is exhausting itself. 

Accuracy: I believe this scenario is more than 50% likely. We are too high on relative pricing with too low a VIX with economic/political/earnings situations to be what they are. I believe my confidence level is somewhere around 66% to 75% likely. At any rate, we will find out soon. Good luck and good trading. I went into Bear on Friday for SPXU.

VIX weekly - expected spike to 45-50 due soon

SPY monthly showing 3 waves up cycle




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