Yet to be displayed since the market's May peak has been a lurching surge in the Volatility Index we might associate with poorly founded fear. Rather, volatility's increase has been more measured, a condition possibly indicative of a prevailing disbelief in any further negative prospect. We see this most clearly via the measure's relative strength (top panel).
Now, it's also clear by the absolute relative strength of volatility's increase since May that, a pullback in this measure appears in order. Indeed, we saw this today. Little wonder. Given a well-greased contingent of "buy the dip" vested interests, we should reasonably expect their being played. However, given no lurching surge of fear yet presented by this measure of the S&P 500's volatility, we can reasonably expect their being abused, as well.
Just how this might play out is difficult to say, but we might gain some insight looking back at the period last year when, according to yesterday's Elliott wave-based view, the 1st wave of 5 waves up forming wave c of b of (b) was nearing completion, with the S&P 500 trending sideways in the mid-September to mid-October period forming the 4th of its 5 waves up from early-June 2012 bottom.
We see more up close here, too, that 5th wave failure (i.e. wave 5 of 1) whose upcoming possibility I have been raising this week. Likewise momentum's similar surge to new heights (see bottom panel) during formation of the 5th wave of a 3rd wave, first from late-August to mid-September last year, then from mid-April to May this year. We might consider this a manifestation of the Elliott Wave Principle's "like from like" phenomenon.
Thus, too, our view forward here regarding formation of wave 4 of c of b of (b) and wave 5 following. It's quite possible the 4th and 5th waves of wave 1 of c of b of (b) forming last year in the mid-September to mid-October period give us insight into what's to come as wave c of b of (b) completes and sets the stage for wave c of (b) down, following.
As we might expect both the S&P 500's RSI and MACD to sink below their respective mid-November 2012 levels during formation of wave 4 of c of b of (b), we can get a better sense of how the well-greased "buy the dip" crowd might be abused, this even right up to the point where wave 3 of c of (b) is about to unfold sometime later this year in a crushing blow ending all discussion of a Fed QE "taper" and raising the pitch for Confetti to go full throttle Weimar.
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