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The long term Wealth Preserver traders my be bored with this post, but we have a correction coming soon. In fact, it could occur at any moment.  Actually, it should be more of a pull back in a longer term bull market.

We have had one heck of a run since the beginning of October and the likelihood is that it will continue because of QE 4.0.  But in every bull run, there a pull backs and I see one coming very soon.

There are two indicators that are usually accurate and both are screaming retracement. So lets take a quick look at each.

The VIX:

The VIX index values move up when the market is falling. The reverse is true when market advances – the index values, fear and volatility decline.

A real world comparative study of the past records since 1990 reveals several instances when the overall market, represented by S&P 500 index (Orange Graph) spiked leading to the VIX values (Blue Graph) going down around the same time, and vice versa.

One should also note that VIX movement is much more than that observed in the index. For example, when S&P 500 declined around 15% between August 1, 2008 and October 1, 2008, the corresponding rise in VIX was nearly 260%.

In absolute terms, VIX values greater than 30 are generally linked to a large volatility resulting from increased uncertainty, risk and investors’ fear from a current market decline.
VIX values below 20 generally correspond to stable, stress-free periods in the markets. Usually when values decline to around 12 it is a sign that a market pullback is coming soon.

As you see in the chart we are sitting at around 12-13 on the VIX right now and both times this year in fell to this level, we had strong declines in the stock market.

The COT

The Commitment of Traders (COT) report is a weekly publication that shows the aggregate holdings of different participants in the U.S. futures market. Published every Friday by the Commodity Futures Trading Commission. The COT report is a snapshot of the commitment of the classified trading groups as of Tuesday that same week.

The report provides investors with up-to-date information on futures market operations and increases the transparency of these complex exchanges. It is used by many futures traders as a market signal on which to trade. When the commercials are Long, they expect the near-term future stock market to rise. When the commercials are short, the expect the near-term future stock market to decline.

Conclusion?

Well the result of both market indicators means a pull back within a longer term bull market is imminent.

Since the VIX is bumping against a historically proven low, we would expect volatility to rise as it has done every single time in history.   In fact, the commercial investors (HUGE MONEY INVESTORS) at the “Commitment of Traders” are now hedging their Stock Market holdings 2 to 1 betting on a market pull back decline.

Both of these combined usually add up to one conclusion. We are topping and setup for a market pullback.  We just do not know how large of a decline will occur and precisely when it starts.  But when it does start, I will let you know immediately and you can check your membership charts to see when a Red Sell signal appears and execute your trades accordingly.

Keep your eyes open.

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