Thursday, August 9, 2012

SPX Update: Signs of a Top?

Yesterday I discussed some reasons that the market's current price zone would make a decent level for bears to launch a counter-attack.  I'm hesitant to scream that this is "the" top, because the short-term wave counts are very messy, and there really are no clear interpretations of the charts -- but there is some additional evidence today that may add some confidence to the bear view.

My best-guess interpretation is that there is either a top in place at 1407, or will be after a slightly higher high.  Let me explain the details and caveats:

The challenge with this type of pattern is two-fold:

1.  It's very difficult to anticipate the exact top with this type of pattern (called an "ending diagonal") -- they tend to run on just "one more high" than you think they will.  This type of top is a process, more than an event, so patience is usually in order.

2.  There is a bullish pattern that mimics a bearish ending diagonal -- and it's extremely bullish.  So if the bearish interpretation is wrong, then it's really wrong, and the market launches strongly upwards instead of topping.

Reason #2 is the reason that I'm still a little hesitant here, and I want readers to be aware that this isn't the type of call to get married to.  As my tagline reads: trade safe -- and don't take unnecessary risk or allow your convictions to trump your trading discipline.  If this pattern breaks the other way, it's probably going to run toward 1475-1485.

In fact, almost every technician who's not a student of Elliott Wave Theory would probably interpret the current charts bullishly. Classical technical analysis looks at the current charts and sees a series of higher highs and higher lows, which is bullish.

Incidentally, back in April when the euro was trading near 1.32, I ran into a similar discussion with some other analysts (who were strict classical technicians). I made the argument that euro was putting in a meaningful top, and took some flak about it because euro had been making a series of higher highs and higher lows -- exactly as we see in the current S&P 500 (SPX) chart. Needless to say, the euro topped soon after, and is now trading near 1.23, so my interpretation turned out to be correct (and a pretty profitable call).

So, those are the caveats... and there are always caveats in analysis and trading.  Personally, I have an innate distrust of analysts who are too certain of their predictions -- I think it breeds complacency; and complacency in trading breeds disaster.

In any case, the chart below details the bearish ending diagonal interpretation.

The next chart considers both possibilities, with the bullish interpretation labeled in black.  Again, the bullish interpretation targets 1475-1485 -- but I'm not favoring that interpretation at the moment.

The next chart compares a ratio of the Nasdaq total volume to the NYSE total volume.  This indicator has been pretty reliable at locating tops -- the idea behind it is that when investors start pushing a lot more money into the high-beta Nasdaq, then sentiment is getting overly bullish.  And when investors get overly bullish, we're usually closer to a top than a bottom.  The indicator isn't flawless, and actually had two failures in a row earlier this year -- but over the prior 3 years, it's averaged a 79% win rate.

Finally, a 3-minute chart of SPX which outlines one short-term bullish and one short-term bearish trade trigger.

In conclusion, I continue to feel this price zone represents the bears' best hope for the foreseeable future.  The charts have aligned to give them a window into taking control; and while I can't promise they'll do so, the opportunity is there.  If the bearish interpretation is correct, it could still take several sessions to play out, so patience is in order.  Conversely, if the market pushes more than a little bit higher from here, then that will be a good indication that bulls are maintaining solid control, and we can probably forget about top-hunting for a while.   Trade safe.


  1. Nice balanced discussion

  2. PL- the last month or so has been one of the more difficult situations I've seen in the ES/SPX.  Normally I'd be of the firm opinion that this pattern of seemingly endless choppiness and wave overlaps can't be interpreted in any other way than bearishly, but I can't shake the sense that it could be building for an explosive rally - I also saw the nested wave 1's & 2's possibility.  So once again you're correct - need to be both nimble and patient here.

  3. Thanks AA -- agree with ya: I can't shake the bullish potential either.

  4. You have predicted a huge pullback every single month since last year, it feels like one of those ancient end of the world predictions.

  5. In response to the troll earlier: