Happy Holidays!

The recent rally off the late-August low has begun to encounter sluggish internals, which leads one to believe that the market shall be poised correct in the weeks and perhaps even months ahead. To this end, we should note the CBOE Volatility index or VIX has moved sharply lower back to levels previously consistent with trading highs in the S&P 500. Moreover, the 20-week stochastic is at oversold level further consistent with a turn higher as it eventually always does. This leads us to believe that a 200-week moving average mean reversion exercise can't be too far in the offing, which would put the VIX back to the 25-level - which would further suggest just a small nasty correction in an ongoing bull market. However, a breakout above this level would suggest a much larger decline is underway.

In layman's terms, while this doesn't prevent the VIX from moving lower and the S&P higher - it simply illustrates that the risk-reward dynamic has now changed to more "risk" in chasing this rally. At the Rhodes Report, we are looking for a trading high near current levels, and are deploying capital to taking advantage of any decline.

Good luck and good trading,
Richard

source: http://blogs.stockcharts.com/chartwatchers/2010/12/market-poised-to-correct.html