When we last visited the weekly charts of the broad stock indices, they were in a test of top formation with wedges having formed. There was just one upside scenario, the Elliott Wave 4 Triangle:
Given that market sentiment is extremely positive out there, we have to make allowance that these rising wedges could be the "wedge as climax" pattern, therefore, making this M Test of Top even more important. The only other alternative to this is what the Elliott Wave people call the Wave Four Diagonal Triangle, a pause before a straight up climax move to make a Wave 5 spike high. Obviously, that would require the markets to pick up steam and just blast up in a near vertical trajectory. So far we have not seen that yet.
At the time, we were waiting to see if the indices could pass the test, and if it did, then expected move up would be a near vertical ascent that becomes the final leg up of this year-long move, the dreaded Elliott Wave 5 top. While I am not an expert on E Wave, I have studied the principles and apply the broad concepts to my analysis since it is consisent with the observations we make in the sentiment cycle.
Over the past few days, I've seen anecdotal evidence of what I call "I just can't stand it anymore" buying, i.e., panic buying being done by investors who typically have a near perfect track record of buying at the top. Add that to what we already know in terms of chart patterns, we must be aware that this could be a market top of significance.
If we take a look at the monthly charts of the broad indices, we can draw a line across from a swing high that was formed on the way down. What we know about this swing high is the fact that sellers came out at this level in the past. And of course, they could be there again. This is what we call a resistance point. It is also used as a way to project upside targets so long as price action is still moving up towards it. The horizontal pink lines are the upside targets for the major market indices.
Last Tuesday, the headline was Meanwhile...The Fat Lady is Spotted. While it was indeed meant to be a humourous remark, the fact is that the daily charts of the Dow Jones Industrial Index and the S&P 500 Index are both registering ADX readings that I have no memory of ever seeing. What does this mean? It confirms that it has gone straight up in a vertical trajectory, and this increases the probability of what we call a "spike top".
I even scrolled back to the big plunge down into the July 2002 lows and the peak ADX reading then was 47, so I am not imagining things here. Nope. Not at all.
So there, be forewarned that we are in an exceptionally dangerous and volatile time. In terms of price action, spike tops repeat over and over in different markets on a regular basis, as I wrote in my essay on the price of gold:
I've been told that depending on when a person came to play the market, their perception of price is forever imprinted. Since I arrived in 1987, I am keenly aware of how fast prices can move down. I also know that before the fall, the final phase of the bubble du jour goes up in a nearly vertical ascent, blasting out all the shorts, sucking in the longs and then explodes in mid-air like the Shuttle Challenger.
The pattern is tried and true, but the problem is that the end stage of a parabolic move is often very treacherous, because in the heat of the moment, people do crazy things such as bet insane size without accounting for the expanded trading range of the bars and wild volatility. Because the price is already way up after a long move, there is less than zero room for error.
If you want to read up on a previous rant about spike tops, I wrote a one in July 2003 as bonds put in a spike top. That's all for this week, and we'll be up and at 'em over the weekend after we finish setting up our charts on TradeStation 7.
04.01.09 14:16 #