Overshooting the Limit

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Further to my post of May 22nd, the SPX:VIX ratio has now overshot its limit. As shown on the Weekly ratio chart below, price has now punched above major channel, trendline, Fibonacci, and price resistance and sits at another all-time high. As well, Momentum has advanced to an extreme all-time high level…exceeding even the exuberant levels reached in 2006/07 before the financial crisis.

The Daily chart below of the ES (S&P 500 E-mini futures index) shows a steady price climb within a rising channel from the breakout in 2013. If price continued to rise at the same pace, remained within this channel, and remained above the 50% Fibonacci fanline (green dotted line), theoretically, price could reach 1990ish by the end of June (or sooner), 2100ish by mid-August, and 2240ish by this Christmas...these are all confluence resistance levels (a combination of Fibonacci fanlines, Fibonacci extension, and channel).

However, such a climb within those time periods could, inevitably, create a massive price bubble-like environment, judging by the current extreme Momentum level shown on the ratio chart above…we may see lots of manipulation of price in between those dates to allow prices to drop at various points in order to relieve such high levels of froth…so, we may see elevated levels of short-term volatility surface within mini -bubbles now and then, and, perhaps, even more frequently for the remainder of this year.

With the Fed holding interest rates low, it’s likely the institutions will continue to take advantage of this facility and push prices higher…however, any unexpected spike in inflation may cause them to reconsider their position…so, nothing is ever certain…with the possible exception of volatility and froth.

Best of luck for this week!

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