If you haven’t read Tony Caldaro’s weekend update on his Objective Elliot Wave blog you should (Teahouse on the Tracks often quotes Tony).  I’ve been a regular visitor to Tony’s blog since summer of 2007 when he was calling for a major top and drop in the stock market.  At the time I thought he was nuts.  Then the top and drop happened and I started paying more attention.  Tony was also correct when he wrote in the waning months of 2008 that we were near the end of the bear market.

In his weekend update, Tony writes about an interesting pattern he has found.  The pattern being that for every $20B in liquidity the Fed provides (via QE or Twist) there is a 1% rise in the S&P.  Tony’s outlook going back for a while now has been that the S&P will make new all-time highs in 2013 and then begin a brutal downtrend that should end the secular bear market we’ve been in since 2000.  Tony makes the case, using his $20B = 1% thesis, that the extension of Operation Twist until the end of the year with an additional $267B will take the S&P up to the area between 1,536 and 1,556 (about 15% higher from Friday’s close).  The all-time closing high for the S&P is 1,565 in October 2007.  But first, Tony thinks the S&P may get down to around 1,267 if the 100-pt pullback that greeted the introduction of Operation Twist repeats itself upon the extension of Operation Twist.

On average for every 1% the S&P rallies, $RUT rallies 1.05%.  Extrapolating the 15% S&P rally that Tony writes is coming means $RUT should rally 16% to around 900. 

I won’t repeat his analysis here as you should go read it for yourself.  It’s definitely food for thought.  It has got me thinking that maybe the golden cross in $VIX and the attending upside explosion in volatility is further off than I had anticipated.  Maybe I should suspend my campaign to get short $RUT and long $VIX until later this year when we are closer to the end of Operation Twist?  If Tony is correct, it would certainly make for a more attractive entry point for short $RUT and long $VIX.  And maybe I should be scaling into TNA over the next couple of weeks with an eye towards hitting the exit close to the end of this year?  A 16% ride on the $RUT escalator going up for the next 5 months would be nice (more since my escalator of choice would be TNA).

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