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Friday, 16 April 2010

Have we just seen the wave 5 top on SPX?

I've been looking at SPX this morning and the evidence that we may just have seen the end of wave 5 of 5 looks compelling. If so we have just made a major top. Let's consider the evidence.

Firstly I was looking at ES this morning and I see that a possible H&S pattern is forming with the right shoulder on that pattern developing now. Looking further at it and dropping my preconception that a rising channel is forming I now see that recent action fits much better with a rising wedge:

Now I am fairly convinced that we are in wave 5 of 5 up from the low in March 2009 here, though we may instead be looking at a wave 3 extension for the bearish interpretation. What we are looking at here is a textbook wave 5 termination pattern and I have an example from EWI of one here for comparison:

Looking at the SPX chart for the wave 5 of 5 up since the Feb 5th low, I have marked in the wave count for what I think now looks like the highest probability count unless we make a new high today:

To add further weight to this scenario, jacksoo pointed out this morning that we hit significant resistance yesterday on a line drawn from the November ES high:

This all adds up to a compelling scenario that this wave top may well now be in. There is still some room for upside in the rising wedge of course, and there is also a little wiggle room on the resistance trendline from the November high, depending on how it is drawn, but not much. If that H&S finishes forming today then I think that it will signal an excellent short on a break of the neckline at 1201.5 ES, at which stage the rising wedge will also be at breaking point. If the lower trendline of that rising wedge, currently at 1203 ES, is broken on an hourly basis, then that will also be a signal to position short.

If the wave top is in, then we should now at minimum now see an abc retracement that should take SPX back below 1100. If the move since March 2009 has been a rally rather than a cyclical bull market though, then the top may be in, and we could then be starting a move towards a new low.

One caveat of course is that wave 5's can extend too. As ever in this strange market, some caution is required. Good trading everyone!


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