Trade idea: I will continue to look for short term trades on the XIV in both directions. I will, however, remain on my toes and attempt to stay nimble during what may prove to be a rather complex wave pattern, writes Mike Golembesky of ElliottWaveTrader.net.
Get Trading Insights, MoneyShow’s free trading newsletter »
Last week the Velocity Shares Daily Inverse VIX Short Term ETN (XIV) moved up into the 83.07-93.56 resistance zone before turning back lower hitting a low of 76.07 on Tuesday, September 5. Since this low, we have seen the XIV move back higher in what is so far counting best as a corrective wave structure. This move higher has held the 76.4 retrace of the move down off of the September 1 high. We have, however, yet to see further follow through to the downside, thus not yet giving us confirmation that we have indeed begun the next swing lower on the XIV.
While I always keep an eye on the spot VIX charts, I typically defer to the chart that I am actually trading in regards to the price levels. I do have to note that price action on the spot VIX chart has been extremely interesting over the past several weeks.
After topping on August 11 at 17.35, the XIV had retraced down to a low on September 1. This low hit both the 88.6% retrace of the initial move up off of the July lows as well as the 100 extension of the initial move down off of the August 11 highs. These are both common Fibonacci price levels to hit during corrective retracements.
Advertisement
When we see price levels converge and then turn within a few ticks of key Fibonacci levels, it gives us further confirmation that we are indeed dealing with a retracement from a previous initiation move, rather than just a local bottom. In this case, that initiation move began with the low July lows and ended with the August 11 high at 17.35.
Furthermore, the move down off of the September 9 high and into September 7 low has so far held the 61.8 retrace of the move up into that September 7 high. This 61.8% retrace level is again another standard retrace level that we look to hold during corrective moves.
The fact that we have held all of these Fibonacci price levels so well in the Spot VIX chart helps confirm what we are seeing in our XIV counts as laid out below.
While I am still looking lower on the XIV into the fall, I do have to note that the structure of the move down into the September 5 low was less than ideal. This is due to the fact that this wave structure does count best as a corrective pattern, which is not what we would expect to see at this point in the bearish count.
Now while the pattern to the downside is less than ideal, I also do not have a good bottoming pattern into the August 17th low. Nor do I have a move up off of that August 17 low that would suggest this was a bottom that would take the XIV back over the July highs without seeing lower levels first. I am therefore still leaning towards seeing lower levels prior to this striking a longer term bottom into the fall of this year.
When we have corrective wave action both to the upside and the downside it portends that we are likely to see a more complex pattern forming. In this particular case, it looks like we may be forming an Ending Diagonal pattern to finish off wave c of (a) of within this forth wave.
What this means in context with the bigger picture is that this particular fourth wave may very well be a flatter corrective pattern rather than a sharp drop lower. A flat corrective pattern would also fit quite well with our Elliott Wave guide of alternation as both wave ((ii)) and wave (ii) in 2016 (which I have circled) were fairly sharp zig zag patterns.
This type of action will likely frustrate those attempting to trade this both to the long side and the short side so caution is certainly warranted (on both sides of this) if we do indeed see this move down complete as an Ending Diagonal pattern.
While the Ending Diagonal count is my primary count at this time, it would still be in the very early stages and very difficult to rely on at this point in time. I will remain open to other scenarios until we see further evidence that this Ending Diagonal pattern is indeed the operative count. This evidence would come in the form of further corrective wave action to the downside over the course of the next several weeks. Until we do see this occur I still cannot rule out that we are dealing with a more immediately bearish impulsive pattern to the downside.
From a trading perspective, there may still be some opportunities to take some very nimble trades to the downside on the XIV. If we are indeed in an ending diagonal, however, the easier money will be made when this Ending Diagonal ends.
I will continue to look for short term trades on the XIV in both directions. I will, however, remain on my toes and attempt to stay nimble during what may prove to be a rather complex wave pattern.
