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SPX Revisits Old Low as VIX Makes Primary Cycle Low

Stock-Markets / Financial Markets 2010 Sep 19, 2010 - 05:54 AM GMT

By: Anthony_Cherniawski


Best Financial Markets Analysis ArticleFDIC Friday back on the job. - The FDIC Failed Bank List announced six new banks closure this week. Only three were acquired by another bank. This week’s failures cost the agency’s deposit- insurance fund $347.6 million.

Shadow Bank Liabilities Plunge By $700 Billion In Q2, $2.1 Trillion Year To Date - (ZeroHedge) Continuing the analysis of today's Z.1 report, we next focus on recent developments in the shadow banking system. And it's a bloodbath: total shadow bank liabilities dropped by $680 billion in Q2, and a massive $2.1 trillion YTD. If one wonders why Ben Bernanke (yes, it's technically TurboTim) continues to print trillions and trillions of debt, and it is still doing nothing (yet) to stimulate the system, here is your answer.

Japan’s Problem Is Bigger Than Yen - (ZeroHedge) After much speculation and many flying rumors, Japanese government stepped in on Wednesday, Sep. 15 and intervened--sell yen, buy dollar--for the first time in six years. The yen had risen about 10% against the dollar this year, and just reached yet another new 15-year high against the US dollar, an eight-year high against the euro, on Tuesday, Sep. 14.

In the context of a slowing economy, the rapid rise of yen is bad news as it hurts exports, stalls domestic consumptions, and further aggravates the existing macro problem (see graph). Toyota Motor Corp. estimates that every 1-yen climb versus the dollar saps 30 billion yen, or $351 million from earnings.

The VIX appears to have made a Primary Cycle low.

--The VIX successfully completed a reversal pattern on Tuesday, its pivot day. On Wednesday, it broke out of its wedge in the hourly charts. It has challenged short-term Trend Resistance at 22.68 on Thursday and Friday. It appears that it may launch itself above the daily wedge formation in the next day or two. Note that the volatility level is nearly 50% higher than at the April low. And it is higher than the VIX low in August 2008. All of these observations suggest a much more volatile reaction in the equities markets.

SPX revisits an old low.

As I was calculating targets for the SPX this week, 1133.50 came up as a maximum in two different calculations. The target jogged my memory and as I looked at the chart I noticed the flash crash in September 2008. That low was also 1133.50. This also coincides with average cycle resistance since the Flash Crash. In other words, the cycles agree that 1133.50 may be the point of no return in the SPX. Everyone is watching the “inverted Head & Shoulders pattern, which suggests a possible new high. As long as 1133.50 remains as resistance, I suggest we should re-examine the larger Head & Shoulders pattern pointing lower.

The NDX triangle may be a diamond formation.

--The triangle formation in the NDX prompted me to research a rare topping formation known as the Diamond Formation. Triangles are known as continuations patterns and some argue that this could be a fourth wave triangle, suggesting a higher outcome. However, its position is suspect, especially after a completed impulse.

So, this may be a Diamond formation, instead. This is composed first of a symmetrical expanding formation or Broadening Top followed by a symmetrical triangle formation.

Gold met its broadening wedge target.

-- It was about a year ago that I identified the Broadening Wedge and calculated its target. It has been on the Weekend Updates ever since.

However, I have been consistently saying that the June top at 1265 was “good enough.” Apparently in this case I was wrong. But leaving the Target on the chart has served its purpose. First, targeting does work and can be incredibly accurate. Second, it can allow us to prepare for what come after, since the biggest problem traders have is to know when to take profits.

$WTIC appears ready to fulfil a continuation Head & Shoulders pattern.

-- $WTIC spiked above its 10-week moving average, then confirmed it as resistance by closing well below it this week. The bearish ending diagonal formation in the daily and hourly charts was completed on Monday and oil sold off the rest of the week. Oil seems to be the leading sector in the decline so we may view it as the “canary in the coal mine.”

There is a Head & Shoulders neckline at 70.76 with a potential minimum target of 58.47. This should set the larger Broadening Formation with its Head & Shoulders pattern in motion as well.

The Bank Index stalled at the 10-week line.

--The $BKX stalled at its 10-week moving average this week. The Elliott wave pattern has a (i)-(ii), i-ii wave count on wave 3, which points to an extended wave just ahead. That is why I had the confidence to move the neckline lower, since wave iii of (iii) of 3 hasn’t started yet. Head and shoulders patterns are most reliable when the neckline is situated at the bottom of a first wave of any degree.

There is a Primary Cycle low due in the next two weeks, so let’s see if the stalling has ended.

The Shanghai Index has fallen below its 10-week M.A.

--The Shanghai Index appears to be beginning its larger retracement that has been called for. Here are some examples of what we may expect; a 50% retracement would take $SSEC to 2513.00. A 62% retracement would take it down to 2468.00. A decline beyond that may put the Shanghai index in jeopardy of joining the rest of the world in a greater decline.

The efforts by the Chinese government to strengthen bank reserves may allow it to weather the storm with much more ease, while our domestic, Japanese and European banks suffer the largest losses. If this assessment is correct, we may see an exodus of capital to the Shanghai index.

$USB has stopped its decline at its wedge formation.

-- The decline of $USB may be ended for now. It has closed above its 10-week moving average. It appears that the Bank of Japan may intervene in our Treasury Bond market, using the proceeds of the sale

of Yen in a surprise currency intervention. Japan may be the primary buyer of treasuries in the near future, putting a temporary floor under $USB.

Friday was a Pivot Day for bonds and there was a completed reversal pattern at Friday’s close. It suggests that Monday may be a banner day for an upswing in #USB.

$USD shows a completed reversal pattern in the weekly chart.

-- $USD completed a weekly reversal pattern and appears prepared to launch above its10-week moving average. This is where traders place a lot of confidence as a buy signal, so we may expect some follow through, once this is accomplished. The next target is the trendline where wave iii of (iii) of 3 awaits.

EW relationships suggest that this rally should go to 103.54, before extensions, while the Head & Shoulders pattern argues for 108.50, once the neckline is surpassed.

I hope you all have a wonderful weekend!


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As a State Registered Investment Advisor, The Practical Investor (TPI) manages private client investment portfolios using a proprietary investment strategy created by Chief Investment Officer Tony Cherniawski. Throughout 2000-01, when many investors felt the pain of double digit market losses, TPI successfully navigated the choppy investment waters, creating a profit for our private investment clients. With a focus on preserving assets and capitalizing on opportunities, TPI clients benefited greatly from the TPI strategies, allowing them to stay on track with their life goals

Disclaimer: The content in this article is written for educational and informational purposes only.  There is no offer or recommendation to buy or sell any security and no information contained here should be interpreted or construed as investment advice. Do you own due diligence as the information in this article is the opinion of Anthony M. Cherniawski and subject to change without notice.

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