A modest proposal for the week (by Springheel Jack)

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I’ve been looking at a lot of charts this weekend to consider how
significant this top may be and there are a number of reasons to think
that it may be very significant.

On the SPX main rising channel since March 2009 the advance has failed
at an important interior trendline almost halfway up the rising channel:

100418 SPX Daily Rally Channel

As for this wave 5 of 5 up on SPX, on the most obvious count it looks
complete, and we both broke the wave 5 of 5 channel on Friday and closed below it:

100418 SPX 60min Wave 5 Channel Break

There are two main alternative counts that I am considering seriously.
The first is that we have just completed wave 3 of 5 of 5, and saw 4 of 5
of 5 on Friday. PUGugridiron has been looking at this count and should
we make a new high from here without any further downside, then it would
be the most likely count, with the 5 of 5 top somewhere between 1229
and 1250.

The other alternative count that I am considering is that we have just
finished 1 of 5, and that we are in a wave 2 that we could expect to
bottom within the main SPX rising channel above 1130. This is worth
considering as wave 1 between March and June 2009 rose 290 points, and
wave 3 between July 2009 and January 2010 rose 285 points, and while
wave 5 would have to be the shortest wave, it could rise as high as 1328
if wave 5 was to be approximately the same as wave 1, as is often the
case. I’m treating this as an unlikely alternate count, but it is worth
bearing in mind.

But I think my primary count is the right one, both because of the wave
and channel structures, and where we topped, and because of the next
indicator, which is one of my favorites.

That indicator is $SPX:$VIX, and on this we do seem to have made a very
significant top. There is a large broadening acending wedge, and smaller
patterns within it. The last touch of the upper trendline marked the
wave 3 top in January, and an interior wedge called the most important
interim top before that. You’ll also note that the three touches of the
lower wedge trendline were at the July, October and February bottoms. We
just saw a touch of the top wedge trendline and the recent interior
wedge has broken, and that is a strong signal that we have just made a
significant top, and on past experience we shouldn’t expect to see a
bottom to the current move before we reach the lower trendline.

The negative divergence on the stochs, RSI and MACD is also worth noting:

100418 $SPX$VIX Daily Wedge

Another indicator that caught my eye this weekend is the $NYA50R daily
chart. Since the peak in May 2009, it has been trending down gently, and
the last touch of that declining trendline was at the September high.
There has been a gently rising trendline since the October peak, and the
last touch of that was at the January high. It may not be significant
that we have just touched both of those converged trendlines, but I
suspect it is. Note also the recent negative divergence on RSI and MACD:

100418 $NYA50R Daily Trendlines

So what can we expect of the coming week? I have a possible scenario
that would be elegant, though it might not play out this way. I’ve
charted it up on ES:

100418 ES 60min HS Scenario and Count

I noticed the potential H&S on Friday, and I think it may well
play out for two main reasons which are that:

  • We only saw three waves down from the top on Thursday, and there
    should be five unless we are in the 4 of 5 of 5 count. We can therefore
    expect a fourth and fifth wave which could finish and play out this
  • Mondays in recent months have all been bullish or flat. While this
    one could be different, I would be reluctant to put much money on it.
    Chances are that this Monday will be the same.

(Leisa here:  I have a sector report that you can download here.)