Transcendental Market Truths:
The Market:
Volatility has been rapidly rising during the last few weeks, illustrated by the explosive rally in the VIX. This is a symptom of an expanding triangle, or megaphone (as West likes to call it), pattern in the market.
This is a pattern which only forms at major tops and the fact that I'm seeing it here is confirmation that the market could be seeing the orthodox top of the century almost complete. Of course, in real terms, the highest high of the century probably already occured, in 2001, when the Value Line Index reached its highest high when valued in ounces of Gold. But, in terms of dollars, the market could potentially exceed its all-time dollar-denominated high recorded on April 26, 2010, within the next few weeks.
Once a megaphone breaks down, it breaks even harder than a converging, diagonal triangle. The volatility of the pattern, with its higher highs and lower lows, indicates that massive manipulation is taking place, and that owners of corporate shares are pushing as hard as they can to sell out for the long term. Some of these shares may have been owned for generations, literally inherited from ancestors long dead. The market may be looking at a decline exceeding the 89% experienced after the high of 1929.
Dow Industrials:
The large-scaile Head and Shoulders pattern in the Dow targets a low of 2700. However, lower targets are entirely possible, with the Dow falling into triple-digits by 2016. Given the rate at which the Dow was falling last Thursday, that shouldn't be considered an outlandish possibility, although it certainly would have to happen over a much longer timeframe due to circuit breakers.
The most likely pattern the stock market is tracing out is a large contracting triangle which started its first leg down in 2000. The largest decline in a triangle is always the first leg down, labeled wave (a), and it's due to bottom, most likely, in 2016. Consequently, the market could potentially see the low of the pattern occur in 2016 at a three-digit Dow Industrials, such as 777, the 1982 low. The good news is that that would be the buying opportunity of a lifetime because the second leg of the triangle, a monster rally counted as wave (b), could potentially carry the market right back up to the level reached in 2000, or even higher. In other words, the market could go from "The Worst of Times" in 2016 to "The Best of Times", ironically.
Short Term:
The rally to the May high has begun, but it won't be in a straight line and it won't be a high-confidence rally. Still, the market should be heading up toward or into options expiration at the end of next week. Whether it makes a higher high is unclear - it would, in fact, be perfectly regular if some indices made higher highs while others failed to do so.
This is not the kind of market which allows one to sleep well at night and this rally will be used by me to position short sales, or buys in inverse instruments, when it peaks.
Bottom Line:
Risk in the stock market is 10,000 Dow points, while reward can only be measured as a few hundred. |
