I haven't tried to anticipate a top in this market in some time. Top calling is a high-risk business, because you're trying to anticipate a reversal in trend before there's any indication that the trend has actually changed. Inexperienced traders can lose gobs of money trying to pick tops (or bottoms), so I'm not necessarily suggesting anyone front-run the market -- but the market has finally reached the zone I've talked about since July 30. As I've said since then: If the bears still have any hopes, this is the zone where they'll need to reverse things.
The charts are a real challenge to frame in Elliott Wave terms right now. If the bearish wave count still holds water, it could allow one more small down/up series... but more than a little higher from here, and I'm going to throw out my top call and go back to playing "the trend is your friend."
The first chart I'd like to share is the S&P 500 (SPX) daily chart and takes a step back from the near-term and shows why this would be a good zone for bears to mount a counter-attack. If bears can't get things done here, then there's room to run back to 1422, and then 1440.
Notice how, in 2011, the market retraced to the equivalent trend line, and then began its collapse from there. What's nice about a top-call like this is that there's a pretty clear zone where you can see that it's either going to work, or it isn't. I've said it before, but I believe that, whenever possible, one wants to establish positions at points where the market has pretty clear battle zones -- because if the market crosses those zones, then that conveys fairly clear information about whether to keep or exit your trade.
The next chart takes a look at the near term. Notice the bearish rising wedge that's formed between the upper blue line and the lower black line. Bears have a window right now -- but if the bulls keep pushing significantly from here, then they will defeat this pattern.
Next is the hourly SPX chart, which attempts to reconcile the wave counts, although the wave counts are spotty right now. The terminal ending diagonal pattern I suggested on August 3 is still alive and well, and basically needs to either be complete at 1407, or run down a bit and then back up to a marginal new high for completion. Again, if the market starts to break markedly higher from here, then fuggedaboutit, and it will be back to playing the trend.
A chart not shown is the Volatility Index (VIX). Over the prior two sessions, VIX has moved higher in concert with SPX. Based on past history, when this happens two sessions in a row, there's roughly a 75% chance that the next session will close lower -- so bears at least have pretty good odds for Wednesday.
Finally, a chart of the Philadelphia Bank Index (BKX). BKX has moved above key resistance and reversed to back-test it. We'll soon find out if the bulls can hold the breakout, or if it's just a head-fake throw-over.
In conclusion, a number of short-term charts have seen minor break-outs, but at the end of a move, it's not unusual to see a breakout that whipsaws. The long-term charts show that SPX is bumping its head on some decent overhead resistance. And as I've shown on the SPX charts for a while, if the bears have any shot in the immediate future, then they need to hold this zone. The window is there for bears to turn things; but if they can't, then the market is cleared for a run back to the previous cycle highs and beyond. Trade safe.
Reprinted by permission; copyright 2012 Minyanville Media, Inc.
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