Bottom line -
 SPX and DAX are squeezed by increasingly narrow up-channels. Something has to give.
 SP500 index volatility has entered a range where past major tops were made.
Both SPX and DAX are squeezing their way along supply-resistance lines defined by increasingly narrow up-channels (Chart 1 and Chart 2). In fact, last week saw the first two consecutive daily declines in SPX since its December low. SPX finished week up by less than one index point on a close-to-close basis.
Our assessment remains unchanged. The advance off the December low remains incredibly mature, if not already over (Chart 3 and Chart 4). Please see Shifting Odds (1/20/12) for longer term scenarios, especially as the Dow closed just 1.7% away from a new recovery high with its recent high only 34.05 index points short. Chart 5 to the right shows top near term scenarios based on the squiggle count on ES.
At the same time, risk premium as measured by the VIX index remains low (Chart 6). While the low levels of implied volatility has been justified by declining realized volatility, current VIX levels leave little margin of safety. Perhaps more telling, the 20-day realized volatility dropped below 10% per annum this past week. It has now entered a range where past major tops were made (Chart 7).