After the VIX 'super spike,' is the worst ahead?

 After the VIX 'super spike,' is the worst ahead?
After the VIX 'super spike,' is the worst ahead?   

Technical strategist Abigail Doolittle is holding tight to her prediction of market doom ahead, asserting that a recent move in Wall Street's fear gauge is signaling the way.

Doolittle, founder of Peak Theories Research, has made headlines lately suggesting a market correction worse than anyone thinks is ahead. The long-term possibility, she has said, is a 60 percent collapse for the S&P 500.

In early August, Doolittle was warning both of a looming "super spike" in the CBOE Volatility Index as well as a "death cross" in the 10-year Treasury note. The former referenced a sharp move higher in the "VIX," while the latter used Wall Street lingo for an event that already occurred in which the fixed income benchmark saw its 50-day moving average cross below its 200-day trend line.

Both, she said, served as indicators for trouble ahead.

Real risks to the markets
Real risks to the markets   

And so it's come to pass at least for the VIX, which has jumped 74 percent over the past three months and crossed the 20 threshold that historically has served as a dividing line between complacency and fear. That's its highest level in nearly two years.

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From Doolittle's perspective, the spike represents a bad-news/bad-news scenario: The move confirms her earlier call, but she thinks the surge in the VIX is far from over. Worse yet is the trend that a rising VIX almost always accompanies a falling market.

She cites technical chart patterns that show "uncertain and less enthusiastic buying action" that reveal the market's nearly relentless rally is tiring:

Now some of those same reversal patterns have started to confirm on a failure of support and this suggests that the near-term selling action is likely to continue and even accelerate despite some possibly contradictory signs in other asset class charts.

This—a significant equity market sell-off in the medium-term—is what the equity index and VIX charts continue to suggest is ahead: a prolonged period of risk-off and one that may come in two stages.

To be sure, market correction predictions have been a losing bet all year and could yet end up as the worst collective call for 2014 on Wall Street, despite the recent market weakness.

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After all, since Doolittle began issuing her prediction of a 60 percent correction, the S&P 500, while volatile, is little changed overall. An expectedly solid earnings season ahead also could reverse the focus on scary macro factors—European economic weakness, the battle against ISIS in the Middle East and the Ebola scare, to name three—and get investors back to looking at the health of individual companies and corporate America in general.

Also, the aggregate value of the VIX—it was just over 22 in early Monday trading—places it just barely above the historical average and hardly indicative of the kind of massive market fear that would precipitate a major selloff.

Still, Doolittle is maintaining her correction/crash call, which sits way outside even the most bearish views on the Street.

In fact, she thinks "violent waves of selling action" could send the VIX all the way to 90—even beyond its peak during the financial crisis. In the near term, she sees a 25 percent correction that would push the gauge to 50.

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