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Friday, December 25, 2009


I realize that counting VIX waves is not the best use of EW technology, but of course I like to count just about everything.   But really, the wave counts are not whats important with the VIX, rather pattern recognition and relationships I think is very useful.  TA can be applied to the VIX so can wave patterns.

For those unfamiliar with the VIX, its known as the "fear gauge". A low VIX reading signals complacency and bullishness. A jump in the VIX is bad for the markets and indicates fear and uncertainty.

Many weeks back I suggested that an expanding triangle would result in new VIX lows because that is what the pattern called for.  This foretold the current strength in the markets.

Well it has happened. And now the VIX appears to be morphing into another recognizable pattern: a falling wedge.

Note that there is a long-running positive divergence on the VIX on the weekly. Recall that the Dollar also had this going for it.

Just one way to "count" this falling wedge. There may be other ways and it may not be quite over yet. Again note the long-winded positive divergence:

Note the mini-wedges. We correctly identified these as they happened and helped determine those mini-VIX turning points. Now arguably there is a big wedge occurring. Bigger patterns = bigger results.

You can even see the positive divergence maintained on the hourly chart:

The positive divergence is significant.  If it breaks down completely, then yes, the markets may indeed get to some astronomical market number like 1200+ SPX.

But for now you have to respect these charts and they are bullish VIX which means bearish markets.

Falling wedges are reliable patterns because they show prices getting "compressed".  This compression is like squeezing a spring and there is built-up energy that when the pattern bottoms, there is no longer anyone left to "push" prices downward. So they rebound the opposite direction rather hard.

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