Volatility double top forming

Yesterday was the action we needed to complete a double top in the VIX. Confirmation won't come until the 'neckline' is breached, but when this happens it will likely coincide with the start of the "Santa rally". One such indicator of a market bottom from the VIX was in the ZigZag peak:

Bill's VIX:VXV ratio is "off the charts"; note the bearish divergence in supporting stochastics:

I have drawn in two necklines for VIX double top confirmation. If I was to make a guesstimate on what will happen I expect a gap up in the market (gap down in the VIX) which is faded during the first part of the day. This fade pushes the VIX towards 72-75. Late afternoon buying brings the indices back to yesterday's close and creates a second spike high in the VIX. On Friday it will be the reverse situation, market will gap lower / VIX will gap higher. Markets will rally in strength all Friday / VIX will fall producing a bearish cover candlestick to complete the second peak of its double top. From there it will be modest market gains on a declining VIX until it breaks 47 when a completed bottom is in place.

Now all that is needed is for the markets to follow this precise plan - should be a piece of cake in this calm environment!

Sidenote: Nasdaq NewLows has far surpassed the January lows, but yesterday's selling and lower close to Friday didn't produce a swing back to Friday's highs.

Other sidenote: TraderMike highlighted yesterday's low volume, which I see as part an exhaustion of sellers, but also a lack of conviction amongst shorts to open new positions.

Dr. Declan Fallon, Senior Market Technician, Zignals.com the free stock alerts, market alerts and stock charts website

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