Sentiment Speaks - XIV Closing In On A Local Top But The Next Buying Opportunity May Not Be Far Off

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Includes: CRF, DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, FWDD, HUSV, IVV, IWL, IWM, JHML, JKD, OTPIX, PPLC, PPSC, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWL-OLD, RWM, RYARX, RYRSX, SBUS, SCAP, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPSM, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, USSD, USWD, UWM, VFINX, VOO, VTWO, VV, VXX, XIV
by: Michael Golembesky
Summary

Price action over the prior year.

Anecdotal and other sentiment indications.

Price pattern sentiment indications and upcoming expectations.

Price Action Over Prior Year

The XIV has seen an incredible run since the February of 2016 low moving from 15.36 to a high of 87.54 on June 26th of this year. This represents a move of over 470% off of that 15.36 low into the June highs. With the VIX trading at historically low levels, the question at hand is; does the XIV have any room left to run to the upside or are we on the precipice of seeing a significant top on the XIV?

Anecdotal and Other Sentiment Indications

As noted the VIX has been trading at historically low levels for the past several months having seen levels into the low 9s in both May and June of this year. These are levels that had never before been seen since the new VIX was created in the early 2000's. Not only has the VIX seen very low price levels but the range it has traded in over the last several months has been exceptionally low. This is evident by looking at the 100-day moving average which is currently sitting at 11.57, a level not seen since 2007. So as the VIX continues to maintain this ultra-low range the XIV continues to grind higher and higher.

Price Pattern Sentiment Indications and Upcoming Expectations

Since the low, in February of 2016, the XIV has been tracing out a very clean impulsive wave pattern that has aligned quite well with the pattern that we have been watching in the equity markets. Currently, we are in the ideal target zone for the larger degree third wave. This was a fairly wide target zone that had come in at the 73.45 - 99.61 zone but so far the XIV has only managed to get into the middle of this zone.

As is shown on the daily chart below we do have what could be enough waves in place on the XIV to consider a top being in place for this large degree third wave right now at current levels. With that being said from a purely structural perspective I would prefer to see yet one more high back over the 87.54 level prior to topping in this larger degree third wave. A break of the 73.78 low would, however, be the initial signal that we have already put in a top for this third wave with further confirmation coming with a break of the 71.67 level.

Once we do confirm the top of this larger degree third wave then I will be watching the 54.16 - 44.87 levels to hold in the larger degree fourth wave. As long as these level are able to hold then we should see at least one more high back over current levels. Potential targets for this final move come in over the 100 level and even with the potential to move into the mid 100’s in the later part of 2018. A break of the 44.87 level would, however, be the initial signal that this count is not playing out with further confirmation coming with a break of the 40.58 level.

So we still may have a few more squiggles to finish off this current move prior to seeing a fairly deep correction we are very likely getting very close to a top. While there will likely be a nice trade for nimble traders upon the next leg down, for those with a bit longer term outlook the next buying opportunity may just be the easier trade to be had.

XIV DAILY VIX DAILY

Disclosure: I am/we are short VXX. 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.

Additional disclosure: Short VXX through put options.