Wednesday, September 25, 2013

Market Continues to Look Toppy

In the last update, I ended with the thought:

I continue to feel that downside risk outweighs upside risk at this moment.  Bulls could do a few things to change that -- for example, a breakout in BKX would go a long way toward causing me to rethink my position.  Barring that, I remain unconvinced that the present rally has staying power; and the market hasn't shown me anything recently to change that view.

The market action since has been encouraging to my thesis, and if I had to sum up the present market with one thought, it would be: "The top appears a lot closer than the bottom."

I want to lead off the charts with the NYSE Composite (NYA), because it represents the broad market much better than the S&P 500 (SPX) does.  The pattern here also appears somewhat cleaner.  We can see there's a pretty clear five-wave structure now in place, complete with a classic third wave overthrow of the upper channel boundary (red iii).  The chart annotations contain most of my thoughts.

The preferred count suggests the top is in, but the structure allows for a marginal new high without creating any material changes in the intermediate picture.  Near-term, I suspect we're going to see the market begin a snap-back rally soon.

The SPX preferred count remains unchanged from the past few updates, but I have deleted the mega-bull alternate count for the moment -- right now that alternate count looks like a low-odds long shot.  Obviously if that changes heading forward, we'll take another look at it as needed.  I still feel the apparent bearish rising wedge (between the converging black trend lines) has merit, and the minimum expectations of that pattern are for prices to return to the point at which it began. 

In conclusion, the charts continue to suggest the market is forming a meaningful top, but as the old saying goes, "They don't ring a bell at the top."  Important turns actually require the majority of players to be caught wrong-footed -- which means the market will do everything in its power to confuse and misdirect before a turn.  That tendency makes nailing important turns particularly challenging -- and tops in particular tend to be very whippy and frustrating affairs, which virtually always drag on longer than you think they will.  The market of the past few months has certainly lived up to that billing.  Trade safe.

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