HINTS OF A TOP
I often hear that trying to pick a top or bottom is reckless and irresponsible from the talking heads and market pundits. I disagree and believe that market timing has a place in any traders toolkit. Speaking to that point, once institutional selling begins, most traders are blindsided with losses before they realize what is happening. They hold on to positions hoping the decline is just another dip and that the ensuing rally will reach new highs. Unfortunately for them, the rally fails when more selling pressure compounds their losses. I respectfully conclude that recognizing when a market is topping is a skill that many retail and professional traders could improve upon. Case in point, markets can easily drop from 10% - 30% or more... even if the decline is an intermediate correction. Don't you think that improving or acquiring the necessary skills to identify a top would be helpful?
FLASHING SELL SIGNALS
How do you know when a market is flashing sell signals?
Liquidation (distribution) of positions by institutions occurs as the market is still advancing!
This subtle behavioral change goes undetected by the untrained eye. Watch for heavier volume with little price advancement (churn) or declining prices when compared to the previous days trade. Several days of distribution forewarns that the "big boys" are heading for the exits.
The Elliott Wave Principle
The wave principle is the only forecasting tool that describes how the market behaves. It's value provides a context for determining the market's general position and outlook. A terminating wave and appropriate wave count within a trend identify and anticipate changes in direction. The first confirming signal that a directional change has occurred is a minor five wave decline.
Look For Divergences
At major turning points, one ore more of the averages may show divergences, i.e. fail to confirm another averages new highs. Also divergences may exists between price and indicators such as RSI, MACD.
Look For Rally Failures
After an initial five wave decline, the first rally (a second wave) from the beginning of a directional trend change will fail on what appears to be a strong opening but by the time the market closes it's down for the day on heavy volume. Astute market technicians will not be fooled as volume will contract as wave c completes. Also, on an hourly chart a technician will be able recognize when the rally fades (a completed w.c) and an increase in volume as selling resumes.
THE TOPPING PROCESS
The Dow and S&P exhibit specific signs of a top that I have mentioned. Both the DOW and S&P show days of distribution (red arrows). Greater distribution appears in the S&P. Possibly the DOW is the stronger indice and that the S&P will be the non-confirming average as it rolls over first. Also note that these events have occurred while the market is still advancing and divergences exist between price, ROC and RSI indicators with respect to each market.
On a seasonal basis 1/14/2011 marked the peak. Also, the Commercials have been reducing net positions since 12/2010 while small and large spec chase this market. Is the little guy wrong again? History and most recent bullish sentiment reading tells me they are.
ELLIOTT WAVE ANALYSIS
Turning my attention to the wave count, the ES-F have reached my target 1291.75, where w.5 = w.1. A classic volume signature also exists whereas the volume of fifth waves is typically less than that of a third wave.
Looking at the 60 minute chart, the minimal requirements for a completed count have been met as price exceeded the previous peak of 1283.5. The advance to 1291.75 can be counted in five waves that would end w.v of w.5. I'll be paying careful intention to the open of the market on Tuesday morning for signs that the rally has indeed ended. Should the market push much higher, the topping process continues. From a wave perspective, there is another common wave relationship where w.5 = 1.618 w.1 at 1367.62.
Let's see what transpires.
Best of Trading
