Our recent analysis suggests we may be setting up to repeat history in an odd and dangerous manner. As market technicians, part of our job is to work with numbers, find patterns and attempt to predict future price moves in US and Global markets. As you can imagine, it is not always easy to accurately predict the future. Still, we take on the challenge and truly enjoy being able to find and share trading strategy concepts with our ActiveTradingPartners newsletter. As such, we are sharing this recent technical research data with your today.
Recently, the ActiveTradingPartners research team identified a unique pattern in the VIX that allowed us to accurately predict the June 29 VIX Spike nearly 3 weeks in advance. Also, on July 30th, we predicted a big decline in the NASDAQ during August. It also allowed us to know that VIX Spikes were possible on other future dates – such as the most recent date near August 4th. Even though the current VIX Spike did not hit exactly on the August 4th cycle date, the actual VIX Spike move happened only two trading days after our predicted date and the VIX has rallied over 90% from recent lows. Sometimes, analysis like this allows us to know months in advance that a cycle or critical event may have a higher probability of happening. This allows us to plan and profit from our research.
Today's research correlates to the recent price moves in the XCI index (Computer Technology), NASDAQ and US Majors. The premise of this research is that the past 4+ years have resulted in a global investment in Technology firms as a result of lower ROI in most other sectors. This focus on technology investing is uniquely similar to the XCI Index DOT COM rally from the late 1990s and early 2000s. We are attempting to verify our presumptions and analysis by using core technical analysis techniques as well as fundamental price analysis.
We'll start by looking at the price activity leading up to the 2000 DOT COM bubble burst. Initially, our analysis focused on the similarities in price action setting up this price move. The Accumulation, Exuberation/Pause, Hype and eventual CRASH phase. In 1995, the Accumulation phase initiated after a nearly 95% rally from 13+ months earlier (1994 – 462 weeks total). Currently, the Accumulation phase initiated after a 100%+ rally from 13+ months earlier (2009 – 427 weeks total). Subsequently, the Accumulation phase lasted 1057 weeks resulting in a 238%+ advance in 1998. The current Accumulation phase lasted 1456 weeks resulting in a 77%+ advance in 2014. Interestingly, the 1998 advance totaled 472.50 pts while the 2014 advance totaled 594.00 pts – resulting in a 125% advance size increase.
The Exuberation/Pause phase in 1999 lasted 252 weeks and resulted in a 207.19 pt move (+31.51%). The Exuberation/Payse phase in 2016 lasted 889 weeks and resulted in a 288.26 pt move (+21.15%). The more recent phase took 3.5x longer (time) to result in 139% greater price advance (which was actually a reduced percentage move of only 67% of the 1999 advance.
Many analysts may be quietly stating, “all of this can be attributed to relationships of percentage values vs higher price valuations”, which is of course true. Our attempt at dissecting these moves is to try to understand the propensity and strength of any future moves.
Lastly, the HYPE phase lasted 39 weeks in 2000 ending with an advance of 895.23 pts (+97.94%) from the PAUSE/FLAG breakout in 1999. The current HYPE phase lasted 53 weeks ending with an advance of 674.54 pts (+40.26%) from the PAUSE/FLAG breakout in 2016. The resulting current HYPE price advance is 25% lesser than the 2000 move and results in a nearly 60% decrease related to the total percent swings.
2000 DOT COM – XCI Index Chart
2017 DOT COM – XCI Index Chart
The 2000 total phase advance lasted 220 weeks and resulted in a price advance of +1607.53 pts (+802.39%). The 2017 total phase advance lasted 436 weeks and resulted in a price advance of +1878.21 (+402.97%). The percent values of each move represent vastly different results, yet the total price moves differ by only 17%. We are certain some of these values and percentage representations are sparking interest in some of you as you may understand Fibonacci, Gann and other price analysis techniques.
The key to understanding these similarities is to understand the price sometimes moves in similar, not exact, setups and that we should never discount the possibility that markets are setting up for another massive move. Considering these price and relationship values, it is our perception that any global event, liquidity collapse or massive terrorist event could present a scenario that may result in a repeat of the 2000 DOT COM market collapse. Our premise is that the US has been an investment safe harbor for many and that Technology (FANGs and others) have benefited greatly from the global market weakness over the past 7+ years. It is our opinion that the capital that has been allocated into these global technology giants has, as in the past, setup a potential for history to repeat itself (given the right type of events/circumstances).
COMBINED DOT COM – XCI Index Chart
Our recent VIX Spike analysis shows we should expect future VIX Spikes on Aug 23rd, Sept 11th or 12th and finally Sept 28th or 29th. Assuming the relationship between the current price setup and the past setup is relative to the types of relationships we've studied so far, we can predict the following:
The initial swing low after the ultimate high (2000) resulted in a 572.02 pt move (a 31.62% correction over 10 weeks). Any current correction could result in an 8~15.5% price correction over 7~15 weeks. This would put our estimates of a price low near 2152~1980 on or near Sept 25th or Oct 23rd. This price low would be followed by 4~12 weeks of price advance setting up a right shoulder near 2150~2256 (possibly). Following that, we would see the low price rotation broken by extreme selling pressure and ultimate low target near 770~581 (resulting in a 63~69% correction from the highs).
Do we know this WILL happen? NO. Can we estimate the probability of it happening as we predicted? NO. How can we tell if this will play out as we are predicting? If the market continues to break down and begins to form the right shoulder, then we would consider, at least this first phase, to be technically accurate. If it fails to move lower to establish this move, then we would consider this a technical breach of our research and attempt to reevaluate our theories.
Thus, what we can do at this point is alert you to the potential that a massive Head-n-Shoulders formation may be setting up in the global/US markets related to a potential Tech Bubble. The proof will come with confirmation of our analysis or the failure of our analysis as price plays out over the next few weeks.
Still, the correlation of the VIX SPIKE dates, Aug 23rd, Sept 11th or 12th and finally Sept 28th or 29th, are interesting because our initial analysis of any price low indicates a potential low price date range near September 25th. Should this become true, an 8~15% correction in the XCI would clearly result in a 4~9%+ correction in the NQ and would correlate with our VIX Spike analysis almost perfectly.
The only thing we can do is be aware of these relationships and price patterns that are setting up and plan our trades properly. Every trade includes risk, attempting to manage that risk is the objective of most traders. At this point, Aug 23rd, Sept 11th or 12th and finally Sept 28th or 29th are critical dates to keep in mind as the future plays out before us. Watching for these moves and being aware that they could be setting up for a massive price swing lower are important factors to consider and being able to protect open LONG positions would not be a bad idea over the next few months.
The only way one can tell if predictions of the future are going to be accurate or not is to wait for the future to get here and see how well these predictions worked out. So, we wait with the understanding that we are watching for confirmation or failure of our analysis with each week.
By Chris Vermeulen