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VIDEOIs the Market Topping Again?
Right now, it appears that the S&P 500 and markets are topping in a counter-trend ABC-X-ABC rally.
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I enjoy making controversial calls based on human behavioral topping and bottoming patterns, often referred to as Elliott Wave Theory. This is a difficult pattern-recognition model to follow as there can be numerous interpretations. Instead, I look for additional clues like sentiment indicators, a few traditional technical indicators, headlines in the news, and covers of papers, etc. Recently I saw an article on Bloomberg indicating that short positions were at two-year lows, with the ratio of longs to shorts at two-year highs. Those types of indicators I use to help confirm if I’m on the right or wrong track with a forecast.
Right now I think the S&P 500 and markets are topping in a counter-trend ABC-X-ABC rally that really started with the May 25 lows of 1040, to the June 21 highs of 1130, back to the July 1 lows of 1011, and now to 1121 so far the highs. That 1121 number is a Fibonacci 50% retracement of the 2007 to 2009 highs to lows, and just nine points below a 61% retracement upward of the April highs to July 1 lows. Evidence mounts now that August could prove tough for bulls and some risk aversion here is a good trade, in my opinion.
Back in late June I saw similar sentiment and Elliott Wave topping patterns in gold as well. The headlines were bullish; the talking heads on CNBC were all saying to buy any dip in gold and stay long. A 21-month rally was topping and I went ahead and stuck my neck out and predicted a multi-month correction. Since then gold has dropped from $1243 to $1158 at it’s recent low, and should be heading to $1043 eventually if I’m right. It takes awhile to knock the sentiment down from overly optimistic levels, just like with the S&P 500 top in April which I forecasted in mid-April as well.(As this publishes, a look at gold stocks shows New Gold (NGD) down 0.76% and Goldcorp (GG) up 0.80%. Other gold stocks include Newmont Mining (NEM), which is up 0.83%, Freeport McMoRan Copper & Gold (FCX) up 1.34%, and Royal Gold (RGLD) up 0.56%.)
The S&P 500 would need to clear 1130 aggressively for me to cave in and call 1011 the bottom. That was a 38% Fibonacci retracement of the 13-month market rally, and it’s possible that was the bottom for sure. Normally though, you would at least get a re-test of that low, and possibly a drop to 942 area on the S&P 500 which is a 50% Fibonacci retracement of the 13-month rally. In addition, the pullback so far only lasted about eight weeks relative to 13 months of rally, so I think there's another several weeks yet before we can call a bottom in 2010.
Below is an interesting chart showing recent action since late May in the S&P 500 Index. Investor’s like to act in patterns and this seems to show a good one. Best to you and your trading!
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