Written by Rick Ackerman, Rick’s Picks
Here’s why the rally will be sharply reversed
VXX, a trading vehicle that tracks short-term S&P volatility, turns out to be pretty good at predicting market disasters. The chart shown made it possible for me to foresee December’s avalanche, although not with the precision that the Hidden Pivot Method allows.
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Right now VXX is saying bulls shouldn’t get their hopes too high following Thursday’s 900-point reversal in the Dow. As powerful the rally was, it would appear to be setting up another plunge that could be even worse than what we’ve seen so far.
How do we know this? Simply by assuming that VXX will reach the 56.30 rally target shown. A volatility spike of that magnitude could only occur if stocks melt down badly. VXX would need to climb a further 7.53 points to reach the target.
To put that in perspective, Wednesday’s 653-point selloff in the Dow correlated with a VXX rise of just 2.29 points. That implies the Dow would need to sell off perhaps 2000 points for VXX to hit its mark. Admittedly, these are apples-to-kumquats comparisons, since I’m inferring Dow weakness based on an indicator that is tied to the S&Ps. Even so, if VXX reaches 56.30 within the next several trading days, both the Dow and the S&Ps would have to be trading much lower than they are now.
No Need for Plunge Protection
Someone in the chat room thought he spied the Plunge Protection Team (PPT) at work when stocks went vertical in the final 90 minutes of Thursday’s session, reversing a big decline. Although the President’s Working Group on Financial Markets, as it is formally known, exists, it seems unlikely they were finagling behind-the-scenes. Who needs a Plunge Protection Team when short-covering maniacs can do the heavy lifting for them free of charge or risk?
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