Will The Dreaded "Double Bottom Within A Triangle" Push The S&P Down To Triple Digits?

Tyler Durden's picture

The VIX is an ephemeral beast beloved by talking-heads and options-market-makers alike (and now FX strategists). In a rather alarming note from CitiFX today, they are concerned over the chance of an explosive breakout as one of their favorite technical setups comes to pass - a double bottom within a triangle. If these levels break then the team expects a test of S&P 1000-1015.

In a note titled "Oh Dear...", CitiFX points out:

The set up on the VIX is now looking increasingly like a double bottom within a triangle. This often results in an explosive breakout.

 

The levels detailed below need to be watched carefully as if they go then there is a danger we get to out 1,000-1,015 target on the S&P a lot faster than we thought.

 

The pattern above is one of our favourites when completed (A double bottom within a triangle.)

 

So far we have not managed a daily close above the neckline which stands at 43.18%.

 

A close above here would complete the double bottom and suggest an impulsive move higher to at least 56%.

 

That is a problem. Not only does that suggest another sharp selloff in the S&P 500 but it creates an even bigger breakout.

 

It has not been our base case scenario that the 48.00-48.2% level will be broken on a weekly close basis on this chart. If, however that does happen then there is a real danger that our 1,000 target on the S&P gets hit much quicker than we think.

 

The pattern on the daily chart above suggests that if we close over 43.18% we will go over 56% which by definition means that a close over 43.18% suggests that the 48.00-48.20% area will give way.

 

A weekly close above here would almost certainly suggest a move to our 1,000-1,015 target on the S&P 500 extremely rapidly. Such a development would also strongly question our present view in today’s’ weekly highlights that further consolidation was likely in the short-term before the next move lower in “risk”.

 

The target on such a break for the VIX would be at least 80%+...we are now officially worried.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Smithovsky's picture

just okay or ooooooookaaaaaaaaay?

Frog-And-Toad's picture

Can someone please break this down a bit?  I am not really sure why a double v suggests a dramatic drop in the S&P.  Thanks in advance for the help!

 

Also, how would you best play this?

Soul Train's picture

heard another rumor, the late upward surge in ES this afternoon was a Hugo Chavez rally.

If his kidney does indeed fail overnight while in hospital, expect a follow through run up to the next support line.

You are now advised.

http://www.telegraph.co.uk/news/worldnews/southamerica/venezuela/8796505/Hugo-Chavez-in-hospital-for-kidney-failure.html

Anyway you look at it, it's bullish. Even if his kidneys don't fail, there will be a continued possibility that he might die of cancer later this year or suffer other complications which would seem to indicate a bullish stance for the West and ES in general. Couple that with prospects for QE+++ and Europe resolved and we may just see SPY 1450 by Christmas day.

Another plus is that none of this Chavez concern affects Greek debt or any of the other PIIG issues. More reason to load up on ES and cover any shorts.

Life is good, and all is on the up and up.

Will be watching futures overnight and DAX CAC FTSE opening in the morning.

ps, and disclosure, --- now with GS, previous Citi and JPM trading desks.

WonderDawg's picture

I'd be willing to bet the S&P will see 1050 before it sees 1450. I'd stake my amateur reputation on it.

But thanks for your GS heads up. Fading...

caerus's picture

the vix is supposed to be an indicator of the implied volatility of ES options, the article argues that from a technical perspective it looks like the vix is going to break to the upside...the article then assumes that given the current market, a vix breakout implies a selloff in the ES...but a high vix isn't necessarily bearish...personally, i wouldn't trade off what the vix is doing

hambone's picture

Tom Lee on Bloomberg just reiterated his 1475 S&P year end target...what a crack smoker!!!

mayhem_korner's picture

Where was the decimal point?

Frog-And-Toad's picture

Thank you very much Caerus

Mike2756's picture

vix is showing a bull flag here.

LongBalls's picture

The VIX is basically a news cycle indicator. Volatility in the market is driven by the news. It's basically a heart monitor of the markets. I can't see how you would even want to trade off this chart. It's not completely useless. But if you are a day trader I wouldn't even look at it.

bluestaq's picture

You seriously don't know what you're talking about.  You can take the VIX and divide by the square root of the number of trading days in a year.  That number, expressed in percentage terms, gives you the next days implied trading range.  If you're a day trader and don't use it you are lacking a useful tool.  It works better when VIX is over 35 and not so well when volatility is low. 

bluestaq's picture

For example, today's VIX closed at 38.62.  

38.62/15.87 = 2.43%

Tomorrow's /ES range will be approximately 2.43%, or 28-29 points.  That gives you an idea of what to look for off any pivots high or low. 

 

LongBalls's picture

The markets are so fucking rigged. My bad for not making that more clear.

bluestaq's picture

/ES range for 9-30-11....27.25.  That's pretty damn close to what I said last night.  Know the tool.  Use the tool.

JuicedGamma's picture

Dooooode it's a DOUBLE UU. Get it?  Awesomeness.

Now go short some Spyders.

Mike2756's picture

nice shades, no wonder you're not selling burgers. scary.

DeadFred's picture

@Frog and Toad

Double tops and double bottoms are pretty stong juju, kind of like Gandolf on the bridge telling the Balrog 'You shall not pass' (not the Monty Python knight on the bridge saying 'None shall pass' sort of weak juju). How they predict how far past the peak it will go has always seemed a bit stetched to me but the double bottom has a lot of psychological power for the market. I know when I saw the double bottom form I said 'time to buy some VIX calls' :). Plays you can make are short positions on almost anything S&P friendly or long positions on inverse funds. I like puts on SPY and AAPL, and calls on VIX. This gives gains if VIX continues up and the (assumed) fall in index equities occurs. I included AAPL because I think the stuff spraying off the fan blades will make people start dumping their profitable positions as well as the stocks that have already taken a hit to the chin. If you like to sleep at night you might avoid options and short SPY or buy inverse funds, leveraged or not, FAZ and TZA are pretty liquid. You can buy VXX shares to kinda sorta play the VIX index but I don't like the fund personally. Critiques from those smarter than me are always welcome.

GeneMarchbanks's picture

You just wanted to be first, admit it OK?

Ruffcut's picture

I've traded options since 2006. The CBOE is conductor of such volitility indexes. I've had the real time charts up for it and see no value in it. It was more a vehicle to program implied volitility for the thousands of option chains.

When the flash crash happened. The option chains went fucking nuts, right along with it. nickel asks went to a buck. It is not a reliable indicator for us plain folk. 

It is european style options chain, to trade and used for market makers programmed pricing, and oh, don't forget a way to fuck the hedgers to protect themselves, and steal a little more cash.

There is a reason for everything and your protection is not one of them.

Gully Foyle's picture

[Peter Falk voice]You haven't lived until you've done it with a waitress. A big fat blondie waitress. I don't know what them society dames are like in the kit, but you ain't never had it until you made it with a big, fat, blondie waitress. If you're ever interested, give me a call.

nobusiness's picture

Have no fear.  The Plunge Protection Team will not let it happen.

nobusiness's picture

Here they come.  Gov capital a blazen.

Mike2756's picture

Volume dumped off on the spike, funds setting up for end of q?

Mike2756's picture

PPT with the stick save at the close!

bxy's picture

1015????  We might hit that tomorrow.........VXX and metals are the play......and of course short the S&P with two hands.

clones2's picture

Yep - just mentioned this exact same thing in your other post below....  Pull up a chart of the VXX as well.  This set a new high today as well....

The charts all seem in PERFECT alignment for some significant volatility. 

caerus's picture

hold on to your shorts boys and girls...

firstdivision's picture

If Citi is telling me to get short, I'm going balls to the wall long. 

HelluvaEngineer's picture

The infamous Double Rainbow pattern

101 years and counting's picture

geez.  been watching that and now that its "out there", there is no chance it plays out.  F-you Citi!!!!

DeadFred's picture

There's still a chance. The purpose of the report IMHO is to screw the hedge funds, those irritating little competitors to Citi and the TBTF. If tomorrow is a big down day plus this report plus the recent chorus of gloomers on the MSM the hedge fund customers will jump ship tomorrow, the last day they can before the end of the year. Why else did they put some no name trader on television to say the world is ending? There's a lot of guys on MSM talking 1000 recently. They're right but why does the cheerleading media put them on. If they can knock off a few percent more hedge fund customers with this post it ends up as less friction for them for the rest of the year. Watch the sell off on Monday when the funds have to liquidate to dispense the funds. Apple will take a hard blow. It already is getting hit harder than it should. Expect even more choreographed media hype about the dire problems ahead. If I'm right Monday will be epic. Who knows?

Id fight Gandhi's picture

Us markets are way over valued compared to the rest of the world. Expect a 15% drop by end of October at least!

laomei's picture

VIX is funny... isn't it suppossedly tracking volatility? It seems more to track markets crashing.

anony's picture

Considering that the market has been stable to up since march 2009, any change in the VIX is a sign of 'volatility' and it will reflect more 'volatility' if we get those same 700 pt. up and down days once again (before the November 2008-March 2009 lows)

reader2010's picture

IMHO their plan is to let those that are misled into 401K using shitty dollar cost avereging method suffer their financial waterloo first. Then those people will beg to suck Bernanke's three-inch dick in the hope of hisPerpectual QE.  Fuck it.

pantheo's picture

see it vice versa. There is not other way to break 1,000 apart from VIX breaking 48. My target is for VIX is 60 and it's coming mid NOV. The rest will be history...

clones2's picture

and 1100 break on the S&P will probably get you about 60 on the VIX.

AcidRastaHead's picture

I once dated a girl that I'd also describe as a double bottomed triangle.

dark_matter's picture

Savvy traders call this the dreaded camel toe pattern. Except for Rastani who dreams of camel toes.

RobotTrader's picture

Imagine the huge prices now being paid for puts with the VIX and VXN screaming towards the highs.

"No price is high enough"