First the Top, Now the Drop

Last week we identified a major top having occurred. After an initial drop from the highs, the markets once again found themselves in a narrow trading range. However, recent wave counts indicate that a more precipitous drop is imminent.

Having failed thus far to form a simple 5 wave correction pattern from Wednesday’s lows, the market has instead remained in a consolidation pattern. This pattern appears to be playing out as a series of nested waves, 5 wave sequences resulting in lower highs, and higher lows. This pattern generally results in a fairly substantial move in the direction of the main trend, which in this case is to the downside.

In this consolidation pattern we have a confirmed 5 wave sequence from the low of 1363.81 on the SPX, to a high of 1376.17. We have also confirmed 5 wave series for the ensuing downside move to 1366.42, and the final move up to 1372.10. We would call all of these termination points of 5 wave sequences, and label them as wave 1s of declining degrees. In order to complete the sequence started at last week’s market high, all wave sequences must be completed. Some of these sequences will be inverted waves, resulting in a substantial move to the downside.

Thursday's Market

The markets traded in a narrow range today, failing to take out either the highs or lows from yesterday. Our call of yesterday’s high of 1378.04 on the SPX being a major top remains intact. Nothing in today’s market action negates this call. If nothing else, the action today may be part of the confirmation of this call, setting us up for a possible downward move on Friday.

On an hourly chart, the market seems to be tracing out a 5 wave sequence from Wednesday’s low of 1363.81. If the market moves higher, into the 1376.5-1377 level, without taking out the 1368 low from Thursday afternoon, a 5 wave move will have occurred. That would make the move from 1378.04 – 1363.81 the first wave of a major move down.

Today’s action could be quite telling.  

Happy trading!

Market Top?

This was a very interesting day for the market to say the least. The struggle to find direction continued, with the market starting the day to the upside. With the low end of our target range for the SPX sitting at 1378.79, we watched the action in the first half hour of trading very closely. The push higher, however, fell just short of that target, with the high of 1378.04 coming within a mere three-quarters of a point of that target level.

With the SPX coming within a fraction of a point of our target, the question becomes whether or not we should consider this our forecast top. While the SPX failed to meet its target level, there is considerable evidence to point to this as our forecast top.

While Wave 5 did not meet its target, Wave 5 did fall within its target. Since we have identified this as Wave 5 of Wave 5, if Wave 5 has topped then by extension we can infer that Wave 5 has also topped. In addition, both INDU and the COMPQ reached their target level for Wave 5 of this wave sequence.

We believe this is enough evidence for us to call 1378.04 the top of Wave 5. Since we have not fallen below the range for Wave 5, there is a small chance we could see one more rally to slightly new highs, but we feel this is extremely unlikely. At this point we do not see the markets reaching new highs anytime in the near future. We believe we have now entered a correction phase, and will proceed accordingly.

Our model does not project target points at this stage, but again, it is our contention that this is a correction of the rally from the March 2009 lows, so the correction could be fairly steep. There are several forms that the correction can take, some of them allowing for new highs, but at least for the medium term we will see a downtrend. We will elaborate on the possible forms the correction may take in the near future.