First things first: Even though I still continue to think that we have more downside in the SPX, I still think that downside will be a relatively short correction and that this cyclical bull market will continue and will likely achieve new all time highs before it is done. Why? For the many reasons outlined in this post: Long Term Projection, Macro, and an Analysis Retrospective.
So if I am bullish for the medium term, why am I bearish for the short term? Because we still have not seen an adequate duration Daily Down Cycle to correct the previous Daily Up Cycle, and because of something I discussed in the post above: the VIX.
Now in the post above, I showed why the VIX is *NOT* saying that we should expect a 'major' top to have occurred in May 2012. Here is the reason why: Yet another reason why I don't think we saw 'the' top (3) (and an update to that chart is in the first link above).
But watching for VIX divergences and the *lack* of VIX divergences at both long term and short term tops and bottoms is a useful exercise, and while there was absolutely no long term divergence at the May 2012 top (the VIX made a new 'recovery low' as the SPX made a new 'recovery high'), there was also no short term VIX divergence at the June 2012 low.
First, lets look at the long term:
There have been VIX divergences at all significant local minima and maxima in the last several years. But there is still no divergence in the VIX when looking at the 2011 to 2012 peaks (the VIX makes a lower low as the SPX makes a higher high from 2011 to 2012 => no long term divergence).
However, all bottoms after significant pullbacks the last few years have been marked by significant VIX divergences. Although we have not seen one during the last pullback.
A short term chart shows another reason why I don't think the June low marked the end of the correction:
We can see a similar pattern of clusters of VIX down gaps taking place near the April 2012 top that are also occurring near the end (potentially the end) of this wave.
So that is what I am thinking:
- Short term the correction is not over and we will revisit the June 2012 lows
- Medium term the cyclical bull market is not over, which means the the correction is a short term affair, and will be followed by new recovery highs and likely new all time highs