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Weekend Stock Market Analysis

(5/25/13)

Right now I'm watching the Volatility Index (VIX) closely as it appears to be developing two possible patterns.  The first pattern is an Inverted Head and Shoulders pattern.  This pattern would suggest a test of the downward sloping trend line is coming which is around the 17 level.  If the VIX breaks above the 17 level then a move up to the lower to mid 20's is possible at some point.  

Since the VIX and S&P 500 generally move in opposite directions a substantial rise in the VIX would lead to a more significant correction in the S&P 500 with a potential drop into the mid 1500's which corresponds to the 20 Week EMA (green line) and 23.6% Retrace from 1075 to 1687.

Meanwhile the second pattern to watch for in the S&P 500 is a Triangle.  In this scenario the VIX would rise back to the upper portion of the Triangle for "d" which would then be followed by "e" to complete the pattern.   This would then be followed by an upside breakout later this Summer with a move into the 20's.  

If this scenario were to occur the S&P 500 would possibly pull back to its rising trend line (black) or its 50 Day EMA (green line) as "d" of the Triangle occurs.  Meanwhile once "d" ends then "e" of the Triangle would follow with one more slightly higher high to follow in the S&P 500.  This would then be followed by a significant correction from late Summer through the Fall as the VIX breaks out to the upside from its Triangle pattern.   

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