Can the XIV Reach an All-Time High as We Approach OPEX?

07/14/2017 2:53 am EST

Focus: STOCKS

Michael Golembesky

Analyst, ElliottWaveTrader

As long as this Ending Diagonal pattern remains, I will remain extremely cautious to trade XIV to the long side or volatility to the short side, says Mike Golembesky, an Elliott Wave analyst covering U.S. indexes, volatility instruments, and forex.

After striking a bottom on June 6 in what I had been counting as a smaller degree ending diagonal this week, the VelocityShares Daily Inverse VIX ST ETN (XIV) has continued to push higher, trading 12% higher from last week’s low into the close on July 13.

We are now once again within striking distance of seeing a new all-time high in both the XIV as well as the S&P 500 Index (SPX). This move up off of last week’s low in the XIV does fit well with the larger degree pattern that we are watching on the XIV as the preferred path is looking for another high over the June 27 high prior to making a larger degree top.

Along with both the July and August futures contracts, the spot VIX Index is also trading down significantly from last week’s intraday high of 13.07 closing yesterday back under the 10.00 level at 9.90.

The July VIX futures contract expires next week and as long as the SPX is able to hold over its shorter term support level and continue to grind higher, then we should see both July and August futures move lower into next week’s OPEX. This will then keep the pressure on the XIV to continue to follow through on its own shorter term bullish pattern giving it enough juice to potentially propel it back over that June 27 high.

In the article, I wrote last week I had focused on the larger degree pattern on the XIV.  I had noted that the XIV is currently trading in our longer term target zone which currently resides at the 73.45-99.61 zone. I also had said that: 

“…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.”

This statement remains to be the case this week but I will note with the move higher off last week’s low and given that we are now within 1 percentage point of reaching the 87.54 level the probabilities of following through and moving back over the 87.54 level prior to seeing the top for our larger degree top are quite high at this point in time. Furthermore, with the break of the 88.18 level, we have now broken through all of the smaller degree Fibonacci resistance levels that would have made the alternate path a more reasonably probable outcome. 

On these shorter time frames, I really would prefer to see the XIV hold over the 83.98 level to follow-through on its most immediately bullish path and I expect to see the XIV hit the 87.76 -91.53 zone into next week with the potential to even see a move into the mid 90’s prior to making its final larger degree top.

A break of this 83.98 level would be an early warning sign that we may not be following through on our impulsive path up off of last week’s low. Furthermore, a break of this level would complicate the smaller degree structure a bit and open the door to several other alternatives on this timeframe. A break of 83.98 would not necessarily suggest an immediate breakdown all on its own but again it would complicate things a bit on the smaller degree time frames.

I am still looking for the smaller degree pattern to fill out and take the XIV to higher levels prior to making this larger degree top. And I do have to caution that both the XIV and the iPath S&P 500 VIX ST Futures ETN (VXX) are trading in the final stages of a potential Ending Diagonal pattern. Follow-through on this pattern would likely see a sharp and deep reversal initially down towards the 60 area on the XIV and potentially even lower before the entire corrective wave structure is completed.

So as long as this Ending Diagonal pattern remains in place, I will remain extremely cautious in attempting to trade XIV to the long side or volatility in general to the short side. I do still think it is a bit early to jump onto the long volatility bus just yet. I am certainly keeping my eyes on the smaller degree pattern to give us the signal so the setup is in place to do just that.

Until that setup does present itself, I am content sitting on the sidelines with my guns holstered and powder dry.

See charts illustrating the wave counts on the XIV and VIX.

Subscribe to Elliott Wave Trader here

Related Articles on STOCKS

Keyword Image
HCA Healthcare: A Fallen Angel
11/20/2017 5:00 am EST

To find "fallen angels" I look to blue chip stocks that have already suffered crashes due to managem...