With last friday’s huge turnaround combined with todays strong 6.5% move, an excellent opportunity to open some new short trades is forming. The patterns for September and November are looking quite similar: 3 weeks of strong downard movement followed by a relief rally. In October that rally lasted for about 3 weeks before losing 100% of the gains quite quickly. It is very interesting to note the clear 20 week cycles popping up on the weekly chart. The current 20 week cycles should continue through the middle of March, 2009, and continue to be bearish.
The sheer velocity of the moves in the markets is astounding, marked by a near all time high reading on the VIX on November 2th of 80.86. Today’s close left the fix at 64.63, a good 20 points above historic "high" levels. This type of pattern in the vix is very characteristic of relief rally’s, and is no different this time. For those of you who trade options, writting call options should continue to be very lucrative over the comming weeks.
The current relief rally did bring the market back above the critical 800 level, which I believe must hold to keep the country out of a much longer term recession, with the possibility of depression. I would look for the markets to rally to a level between 891 and 928 before turning around and retesting the November lows of 741.
I am currently watching the PPO and ADX very closely. The PPO is showing some signs of forming a bottom, which I belive could put the market into a several month sideways pattern as the bulls and bears duke it out in a bloody battle for market dominance. The key level for the bulls is the October high of 1044.31. I believe it is reasonable that the market could test this level sometime between the end of March, and the end of June, 2009. In order for this to happen, the current 20 week cycle must begin to level out, and the indicators have to make some advances against the bull. Also, look for the vix to come back down to earth.
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