Could Weird Wally Wednesday wander over to the weird, wooly world of cycle dates?

I'm surprised that I'm posting this but there are times I've got to wonder about the long-term cycle projections, not from the usual sources I've learned to trust - Cycles News & Views, and ChartsEdge - but the Armstrong business confidence cycle model and the Bradley model. First - I'll put it out there, I have NOT had good results trying to trade on the basis of these latter two, so for me it's just an academic exercise. But an interesting one, nonetheless. Here's a post I wrote back at the beginning of this year about the Armstrong cycle model: http://unbiasedtrading.blogspot.com/2009/01/some-thoughts-about-cycles-models.html. Among my comments was that I believe the VIX may have a somewhat better correlation with the Armstrong dates, which actually makes some sense when you think about it fundamentally. I mean, VIX and VXO measure confidence versus fear - and the equities markets don't always make highs or lows simultaneously with VIX/VXO lows and highs.

Here's the Armstrong date listing (see that prior post for more information), and my current VIX chart, big picture daily. You probably can get the point when you just compare these. The VIX does have the possibility on its chart of dipping into the next Armstrong date:

I saw a VIX analysis yesterday where someone was trying to show that the VIX has an Elliott Wave 5 upward still to go. That's the type of thinking that clues me in that the VIX may have something else in mind. Elliott Wave does not apply to VIX, in my opinion, especially because VIX is mean-reverting. I do harbor a secret thought that the VIX does move in ABC three-wave movements, but I don't post those labels because I think they would be misleading and confusing.

Having said that, we obviously saw a triangle trap in the VIX back in November/December 2008. That alone should clue us in that there would not be a "fifth wave" off that movement. There was also that spike down in January ... well, I guess I should not bring out my "mother ship" joke right now, but suffice it to say that I don't believe those spikes are really so random and meaningless. All in all, I'll go on record saying that the VIX movement of the past 2 months can easily be seen as corrective, in a very similar pattern that the equities markets showed during February, and the next big movement will be downward in a sort of "completion" of the downwave the VIX exhibited from late November into early January. And a reasonable target level for that can be the range of 33-35 (subject to fine-tuning with Fibonacci retrace levels).

Just when the VIX may finish what it's doing upward, and fall under my support trendline and also under its 200-day moving average, is a question that can be answered in conjunction with Merriman's weekly commentary on important time frames, in his comments for the upcomign week of March 9, and the Fibonacci time zone comments I posted after this post (Saturday morning).

And let's not forget Weird Wally Wednesday. This is a reference to the options/futures rollover time period, the week prior to the month's opex (options expiration). (And don't forget the accelerated option premium depletion during this time frame before opex, if you're trading options - if you don't understand what I am talking about, you should NOT be trading options!) It is a time frame when there can be significant market gyrations relating to a turn, even if just a short time-frame turn, on the Wednesday or Thursday during the week prior to opex. All of these factors, coupled with what can be a diagonal wedge in the small time frame, can be harbingers that we are at or very near a market turn.

Let me point out one more thing, especially for Elliott Wave aficionados: I see that the wedge that seems to be forming is only on the hourly chars, not the daily chart time frames. This can mean that whatever wave is being ended, is not of a sufficient scale to mark "the big market low" that lasts for the future. Then again, there's another point to consider - in many markets, there appeared to be a triangle formation (I discussed it particularly with reference to the Dow Transports, you can use that label to find that discussion). In the Dow Transports, it pointed to ~2600, and it got there. In the SPX, IF it's valid there (and I wasn't 100% certain, but it can be possible), I measured the target as 640 (another reason why I will not be surprised if the SPX has a bit further to go into early next week, to get to 640). Now, Elliotticians, what do you expect to see after a valid 4th wave triangle? That's right, a 5th wave thrust. If you measure the triangle to have finished in February (as Teaparty seems to do for the SPX), then the movement since then does look like a thrust movement. These are reasons to consider the move down since then as a thrust movement, that would finish the move down (whether you consider it an A wave, a C wave, or even a big first wave).

My computer has been slow all morning and is still conducting a scan - a poor excuse I know, for not charting out all the different ideas I'm trying to convey, and the different Elliott Wave possibilities from here. But I will just have to summarize for now: I think there is still a faint possibility that we see the completion of a flat with a C-wave up, but I think that idea has flaws. More likely is that we see a large B or X wave up, perhaps to 960 or 1060 or similar significant number, followed by rolling over lower. Or it can be a large second wave up, which could provide a nicer higher level (depending on whether it is a sharp correction up, or more of a sideways correction which seems to happen often with market decline second waves). Still again, if you view the move down as a large diagonal with an expanded fifth wave, that can provide a very nice pullback up. Then finally, I must acknowledge there remain other, far more bullish ideas, that we see either a large diagonal up to complete a large Wave V, or even a large third wave if we are currently completing a large second wave.

At this point I don't want to "vote" for which Elliott Wave pattern unfolds in the future. I just want to point out that we don't want to "short the hole" as my late trading mentor used to say! If you want to go long a bear market rally (as I do), I believe the opportunity is either coming up this week, or will present in the next couple of weeks.

Let me say one more thing - I've often seen the following pattern after the completing of an ending diagonal wedge: First there is a sharp movement back to or somewhat overlapping the diagonal channel - in this case it will be a movement up (after the diagonal finishes of course, and I outlined my thoughts that the diagonal may not yet be finished and might want to finish about 640 - but not guaranteed, it can potentially be done with vibrating 660). Then, there is usually a significant movement back again - in this case, it will be down - as a test, that is also the second wave or small b-wave of the first movement in direction of the new trend. All a way of saying - once the diagonal is done, expect first a move up, then back down, and then we can have the nice tradable rally upward.

All reasons for traders to remain on our toes!

PS - ADDED: I've seen a couple of explanations for why the VIX can show a divergence from equities (what I'm calling a "complacency divergence"). One of the most sobering (which I think I may have read at Schaeffer's Research) is the idea that large investors don't need to buy as much put protection for their long positions, as they have been divesting those long positions. Now, that same idea indicates that those sales can help build up a cash position on the sidelines, and indeed there's an interesting article, The Rally, When It Comes, Will Be a Doozy, at Seeking Alpha on the topic of cash building up on the sidelines. But of course, as the author Todd Sullivan acknowledges, it can be months before such a rally shows up. And, this article on VIX is worth reading also: Markets Continue to Fall, But VIX Is Relatively Flat, by Bill Luby and posted at Seeking Alpha.