SPX: A Major Top Could Be in Place

By: TheWaveTrading | Sun, May 18, 2014
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In the weekly update of March 9 I have discussed that due to the internal corrective structure of both up legs from the October and February lows it seemed probable that price was forming an Ending Diagonal.

If the Ending Diagonal idea pans out it could complete a Double Zig Zag from the March 2009 low.

SPX Double Zig Zag Weekly Chart
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Is the Ending Diagonal done?

Tuesday's breakout failure could have completed the wave (V) but we will not have a confirmation as long as the current bounce, which is corrective, will establish a lower high. I doubt that the 50 dma will hold a fourth time another bout of selling.

There are plenty of supports that could deter a meaningful decline (The major ones are 1813.55 which is the last higher low and the rising 200 dma which today stands at 1786) but an Ending Diagonal is usually followed by a sharp decline retracing back to the origin of the pattern and if price has completed the Double Zig Zag from the 2009 lows then price would retrace much further.

SPX Enfing Diagonal Daily Chart
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Therefore we can see in the monthly chart that if the 10-month m.a. Is penetrated it could define the beginning of a bear market cycle. Probably price should retest the former breakout layer 1576 - 1553. If this support does not hold than it would lock in the advance from the 2009 low as a complete Elliott Wave pattern (Double Zig Zag) opening the door to a much larger decline with a potential target in the range of the 0.382 - 0.5 retracement.

SPX Monthly Chart
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Regarding the long-term Elliott Wave pattern, since the advance from the 2009 low is corrective maybe we could have two options:

SPX Monthly Ending Diagonal Chart
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SPX Monthly Wedge Chart
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So we have a possible ending pattern (pending confirmation of a lower high) but in addition breadth indicators are displaying negative divergences and sell signals.

NYSE McClellan Oscillator Chart

NYSE Summation Index Chart

SPXA50R versus SPX Chart

Regarding the short-term Elliott Wave pattern, the assumed wave (V) of the Ending Diagonal scenario should have been established with a Double Zig Zag. The last up leg has been a thrust following a Triangle wave (B).

Even if the first down leg is not impulsive it should not prevent a meaningful decline provided the current bounce establishes a lower high in the range 1882 - 1887.

SPX 60-Minute Chart
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Odds favour a lower high not only because the internal structure of the current bounce is clearly corrective but also because VIX should be on the verge of completing a bullish Falling Wedge.

VIX Bullish Falling Wedge Daily Chart
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TheWaveTrading

Author: TheWaveTrading

TheWaveTrading

Contact: If you would like to contact the author, you can e-mail him at thewavetrading@gmail.com

The main objective of this project is to share my views on several markets and asset classes.

In the initial stage TWT website will be a free service.

My main focus will be the equity market with SPX being the leader but I will also follow US equity sectors, major European indices, fixed income, currencies and commodities markets.

My analysis is based upon traditional Technical Analysis, Elliot Wave guidelines and investor sentiment.

My goal is to establish the most likely path that the price of a particular asset will undertake and profit through ETF instruments both on the long and short side and mainly with leveraged ones (2 x & 3 x).

The advantage of ETF investments is that it allows getting involved in equity indices & sectors, currencies, fixed income, commodities etc.

Therefore the main purpose of TWT will be to establish investment strategies regardless if the market is in an up trend or in a down trend, leveraging the chosen scenario while managing the risk by establishing protective stop losses.

Hence I will always define the risk, I will try to let winners run the wave and I will cut the losses if my strategy is wrong.

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