This dead cat bounce has its leg

Happy Tiger's Year!

A few days ago, I shared with you the S&P 500 chart that showed a deeply oversold condition, poised for a rebound.

Today, I'm sharing a similar kind of setup but in an inverse way via VIX. For long time readers of my blog, you know VIX often serves as my crystal ball, a quite reliable one actually! 

As the chart shows below, not only did the VIX hit its highest level in a year during the recent market decline, but the Bollinger Bands are the widest they've been in a year. As we all know, when VIX goes up, the market tends to go down. But nothing goes up in a straight line, especially for VIX. When it goes above its BB range, it tends to come back inside the BB range. So, it's due for some sort of action that causes the bands to narrow. When VIX is in an extremely overbought condition as of now, what action followed is usually in the form of a falling VIX – which typically goes along with a rising stock market.

You probably noticed that we had a similar setup in early December (left blue arrows). Back then, the S&P gained about 300 points over the next month. But most technical indicators are more oversold today than they were in early December. So, there's a lot more energy to fuel an even stronger move.

It looks like we're set up well for a sustainable rally that lasts for a few weeks!🤓

Last Monday, S&P hit its worst closing of the month by crashing down to 4240ish. Using the last Dec bounce of 300 points as a guide, we should see 4540ish as a minimum of the oversold rally. Well, we are already nearly on the target now as S&P 500 closed at 4515 today. Are we done with the rally? I don't think so. VIX is still quite high right now at 24 and the daily momentum indicators are nowhere near the neutral level yet, not mentioning overbought conditions. And we are only seeing two days of a substantial rally. All the indicators suggest this round of rally, which maybe just a dead cat bounce after all, may likely continue for a while. I won't be surprised to see another 200 or more points of gain for S&P from here before this rally is over. Of course, I don't know exactly how far it can go and when it will end. But I'm keeping my long positions for now and use TA indicators to guide me when I should offload. 

While I'm quite bullish at the moment overall, I keep my mind clear about two things:

• It won't be a straight line up for this rally and we will see some back and forth moves on the uptrend;
• It's unlikely that we will see new highs from this rally. Rather, there is a high chance that we may see another plunge that is potentially more severe than the recent lows we just saw.