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Wednesday, October 21, 2009

Intermediate Tops and Changes



Looking at today's top reminded me of the topping pattern in May. That May top at 956 SPX too had a big gap up and then a series of harsh up and down moves (that actually formed a triangle technically) on weakening momentum and negative divergences. Simply put, the pattern smacked of distribution.

What can one say about the May high of 956? The biggest lesson was that the market wasn't ready to tackle a major resistance zone (950-955) and keep moving up in smart manner. Since it was an Intermediate wave high, it required an intermediate wave correction. That correction took us back to 869 in July.

The recent action in October is in a similar situation except the momentum divergences are much more pronounced and the rally is much longer in the tooth. The market has come upon the "breakdown of 2008" resistance of 1100 SPX. This is major resistance and represents the spot where a likely "overhead supply" of paper comes out ready to sell. Tough nut to crack and after a spirited rally since 869, this intermediate sized wave looks ready to correct.

Again the pattern looks the same in May. Gap up and distribute at a major resistance.

Oh they tried today to capture 1100 to be sure, but it was waning and the bulls gave up and headed for the door late afternoon. There may be others ready to step in bulls shoes but why?

The SPX "breakdown gap from 1097-1099 was closed. The NASDAQ breakdown gap to 2187 was closed today also. The DOW made a healthy splash above 10K for a bit. And they are selling the news for the most part on earnings.

Looking at a daily chart from the March lows, you can see the rising lower trend line that supports advancing prices. In theory, a break of this trend line will "confirm" that P3 is upon us.

Some like to think its just another intermediate wave sized pullback and then advance to 1200 or so. i have no crystal ball but it doesn't seem likely from an EW standpoint. If this is a wave 2, we expected a sharp zigzag rally that approached a 50% retrace. Indeed it did. And Nasdaq was way higher than 50%.

Simply put, if you believe this is P2, then there is no reason for a higher price above 1100. There is no reason for a more complex pattern other than the "ABC" form that I have charted.

There is no reason for the SPX to try and slug its way through major resistance areas between 1100 to 1200.

And of course why do people site 1200? Why not 1260? Or 1300?

1100 makes sense. Its knocking on the "door" of the breakdown and yet there is no reason to let the market back above. Perhaps thats reality setting in. Perhaps the path of least resistance will reveal itself to be down.

The market has been like a game of chicken. Everyone heading for the doors will produce huge moves down.

I am not going to sit here and say "P3" is upon us. You know what I think anyways so its redundant. All I am suggesting is that this intermediate wave I have labeled as (C) is due for an intermediate size correction for starters.

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