Awaiting the 5th wave...

Its always important to be aware of the longer term picture and what I see in the two year weekly chart is a one and a half year old bear market. It seems to fit well with an Elliot wave pattern where we've completed the first two of three downwards cycles. That is, we have moved beyond denial (wave 1), more recently acceptance (wave 3) and now we await the final downwards cycle (the fifth wave) of panic. A big unknown is how far we will rally in wave 4. I would guess that the 200 dma could be reached but its moving lower each day and I'd place an upper limit at $650 on the Russell 2000. A lower target is very tough in such extremes but I'd guesstimate somewhere near $250.

Since we're waiting for panic I think it's appropriate to look at the fear index. Below I have the VIX plotted over the same period of time as the $RUT above. The index is currently down trending but there seems to be major support at previous resistance of 37.5. I could see the VIX drifting lower for some time but holding that level because a break of 37.50 should send it significantly lower which would ignite stocks. I'd conjecture that eventually a compressed VIX would pop big, beginning the fifth and final wave lower in stocks. Under that scenario the ultimate bottom is likely to coincide with new all time highs on the VIX. But again, the VIX could drift lower for a time lifting stocks.


On the more bullish side, a number of commodities are looking better on intermediate term time frames. If the recent lows in equities like DBA below can hold, it may great year for commodities. DBA has the potential to form a nice inverted head and shoulders with a target near $33 when/if $27 breaks. DBA could pullback further, as low as $23, before rounding out the right shoulder so I'd wait for lower prices to buy dips. Good luck, it should be a very interesting week between the Obama inauguration and a string of earnings reports.