Price Action Over Prior Week
Last week we saw watched the XIV make an overlapping grind higher as the SPX continued to consolidated sideways for the entire week. We saw some initial signals of a breakout higher on the XIV on Thursday with follow through finally occurring on Friday.
So the question we now have at hand is was this breakout only the beginning of a larger move higher was this breakout simply getting that much closer to a local top in the XIV.
Anecdotal and Other Sentiment Indications
We had three major catalyst events last week that kept traders on the edge of their seats with one after the other promising to be the one that would finally break the SPX out of its two week range. First we looked towards Wednesday's FMOC rate announcement followed by Friday's Bank Of Japan's stimulus announcement followed shortly by the US GDP announcement.
At the end of the day these announcements did very little to break the SPX out of its very tight range and in fact we ended the week almost exactly where we began it at the 2173 level.
We did however see a significant amount of movement the VIX futures and the ETNs & ETFs that track the VIX futures with the XIV (Inverse Daily VIX Short Term ETN) closing the out the week up to 9%. This strong move up in the XIV did not however come in a straight line as Volatility traders like there equity counterparts seemed unwilling to commit to a direction and left most market participants guessing as to which way Volatility would finally break.
Friday we got the answer as the XIV produced a bullish breakout pattern that gave us an indication that the Volatility traders were once again ready to take a commitment to push the market once again. This is a trend that is likely to continue into the early part of this upcoming week.
Price Pattern Sentiment Indications and Upcoming Expectations
The price pattern on the XIV was quite sloppy all week as we formed a consolidation pattern in the form of a triangle that ran in the direction of the overall trend. When this triangle ended the XIV broke out strongly to the upside quite sharply as traders finally realized that all of the data for the week was not going to crash the equities market.
We are now left with a fairly clear pattern to the upside that is within our ideal topping zone for this wave structure off of the 24.45 low.
Additionally the VIX Put Call Ratio is currently trading close to the 2.0 level as indicated in the chart below. A close above the 1.0 level on the VIX Put Call Ratio has been a fairly accurate signal that we have a tradable top in place in the past. This along with the sentiment patterns that we are seeing form is giving us further evidence that the XIV is likely forming a local and tradable top.
Now with all of that being said we do still look like we may have a little bit more work to do to finish out the pattern to the prior to topping and as long as we hold over the 32.90 level we will likely will still see a few more minor squiggles higher prior to topping. A break of this 32.90 level however will be the initial signal that we have formed a top with further confirmation coming with a break of the 31.42 level.
Exactly how deep we correct off of the highs is still a bit of a question mark and we will be keeping a very close eye on the wave structure off of the next top to help give us some clues to just how deep of a retrace we can expect prior to heading back to higher levels in the XIV.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.