I know some of you don't like Elliott Wave analysis, but I'd like to share a case in which EW seems to agree a bit with some technical analysis trendlines. In lieu of recent bullish activity, I think we are starting our last ride higher (I know it feels like bears have been saying this forever). If we get one last hurrah, I think it may be one of the greatest shorting opportunities in some time. Keep in mind, I'm not claiming to be an EW pro or anything … my count is just one of the many out there.
Here's what I'll be watching SPX for in the next two weeks (different paths we could take are denoted by p1, p2, …):
- (p1) We could go up to the 1075-1080 range and form a right shoulder of the classic H&S pattern (with 1100 being our head and 1080ish our shoulders). This would truncate 5 of (C).
- (p2) We could float a bit higher to 1100 to form a double top. Note that in a linear scale (chart is log), the 2007/2008 trendline stops us at around the 1100 area. Personally, this would be my favorite scenario. This would also truncate 5 of (C).
- (p3) Let us not forget what happened in July, the H&S that broke the neckline only to zoom back above it. If this happened again, 4 of (C) would be that failed neckline break and end later, rather than having ended this past Monday. I consider this path the least probable.
- This fifth wave could very well turn into a behaviorally greedy one characterized by a rapid rise into OPEX, followed by a rapid decline.
- (p4) The next important level is the 1120 region. Here lies the 50% retracement for SPX from the October 2007 highs to the March 2009 lows. This would be another good place to turn back down and create a new head of a H&S pattern (meaning 1100 is the left shoulder).
- (p4) The last levels to watch would be the 1140-1160 range. Here, we have some things converging into these price levels:
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- We would be testing the 2007/2008 trendline (in log scale) around the 1140-1150 range.
- The maximum for 5 of (C) so that 3 of (C) is not the smallest is 1152.23.
- At 1158.76, (C) of [2] would be equal in length to (A) of [2].
Some of you may look at 3 of (C) and notice that [i] and [iv] overlap. According to EWP (Elliott Wave Principle by Frost & Prechter), this can happen in the case of an expanding diagonal (blue trendlines). All in all, we are still looking at the end of primary wave [2] (if that hasn't happened already). Any upside left has its days numbered so I am watching the following levels on SPX to short on this leg up: 1075-1080, 1100, 1120, and anything in 1140-1160, if we get there. This market is very vulnerable; one sneeze could start a waterfall. I think in the intermediate-term, there is more risk in being long than in being short.
