A Possible S&P Top?

BarroMetrics Views: A Possible S&P Top?

Tyler Durden in “A Three-Month Flat Market” says:

“not only is there no volume breadth to the recent move in the markets, but the actual push higher likely occurs on at most tens of thousands of futures contracts on a daily/weekly basis. The fact that literally several blocks of AH trades, used persistently, can move the market higher by 6% over the past 3 months, even as regular trading accounts for absolutely no part of this move, and that the SEC finds nothing troubling about this phenomenon, should be sufficiently telling about how “efficient” US markets have become.”

Figure 1 shows what Tim means.

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FIGURE 1 S&P Futures

In Figure 1, the Blue line represents the ‘pit session’ open to close; the brown line represents the ‘after hours’ trading. You’ll notice that prior to mid-September, the normal pattern was for the ‘pit session’ to set the trend. Since September,  you will notice that the ‘pit session’ shows a sideways trend while the ‘after hours’ session has shown an uptrend. The assumption is since the ‘after hours’ has less volume, the market has been rising on declining volume.

Figure 2 shows the Normalised Volume and a Close-Line chart of the S&P (‘pit session’).

2009-12-28-blog-normvol.jpgFigure 2 Normalised Volume

You’ll notice that since September, volume has been declining. There was a two-day flurry on Dec17 (down day, current 1-d swing low) and Dec 18 (up day). Since then volume has dropped off dramatically – probably due to the Xmas/New Year break.

What the two charts show is this: the rally from 994 (basis cash) to 1126 (Dec 24 close) has occurred without public participation. These are classic Wyckoff signs of a possible top

The next question is what needs to happen for me to participate?

Firstly I have certain upside boundaries: Figures 3 (cash S&P) and  Figure 4 (S&P March) show the Maximum Extension. If a top is to occur, the markets should not accept above these prices.

Secondly, I will participate in this sell-off (if it occurs) only if there is a Forecasting or Lagging Change in Trend Pattern (See Nature of Trends).

The only possible pattern on the horizon is an 18-d Diagonal Terminal. This calls for a decline to the red line (Figure 3) of between 6 to 10 days, followed by a final high. I’ll deal with the ramifications of this pattern if it occurs

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FIGURE 3 Cash S&P

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Figure 4 S&P March

2 thoughts on “A Possible S&P Top?”

  1. Dear Sir , can you help me to clarify some of your observations ?Upside boundaries ; where do you set them ? 18 deg.terminal diagonal; why 18 deg ? If I extend the red line I reach 1180 , if I extend the blue resistance line 1165 , which line extension do you consider valid ? The bottom red line and the blue resistance form a rising wedge, usually a rising wedge breaks down at 2/3 of its length , which points to this area 1165-1180 and end of march ? Can you specify wich time frame do you observe for this 2/3 limit ? Wishing you a very successful year Philippe

  2. Hi Philippe

    Thanks for your questions.

    The red line is a trendline joining 18-day swing lows (monthly trend)

    I don’t follow your question regarding the validity of the blue trend line.

    That line is a trend line starting at an 18-day swing high and joining the subsequent highs. If (and I say ‘IF’) a diagonal terminal is to form, then we’ll probably see a small penetration of the Blue line, followed by sell off.

    I’m not too concerned about the 2/3 rule because prices are so close to the Maximum Extension. By the time we see prices near the 2/3 point, we should have seen either:

    1) acceptance above the ME (in which case I am wrong about the possible top) or
    2) Rejection off the Blue line.

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