This is something we have been discussing in the trading room during the past few days. As followers of our newsletter know, we think the equities indexes are trying to find a significant top this year or early next year, and it's even possible that top could arrive as early as August or September.
In any case, we are asking ourselves when the rally since early June in the S&P 100 Index (symbol OEX) will be completed. The end of that rally could be the major top we have been looking for, or it could represent one of the final moves that would lead to a top later in 2012 or 2013.
Based on a larger Elliott Wave picture and on some timing cycles, we expect the June rally to take a corrective form - probably consisting of three waves, or combinations of three waves. Until recently, we had been viewing the rally since June as being a complex corrective "W-X-Y-X-Z" move, as shown in the OEX daily chart below.
S&P 100 Index (OEX), daily bars, scenario #1
The count works, in that it fulfills Elliott Wave rules. The count might still be correct. However, there are several things that make us think it's not quite right. As one consideration, there is a lot of news due around the end of the month, including the announcements and news related to the Fed's meeting at Jackson Hole. In addition, there are at least a few prominent financial pundits who are calling the past week a top, and the fact they are saying so diminishes the chance that it actually is.
So, considering alternatives, we examined what the summer rally would look like if it were tracing out a 3-3-5 corrective pattern instead. The move up from the June low to point "(a)" on June 19 looks like a 3-wave sequence. The series of overlaps from "(a)" to "(b)" can be counted as corrective. Then we would look for a 5-wave impulsive pattern starting on July 24. This count is shown in the daily candlestick chart below.
S&P 100 Index (OEX), daily bars, scenario #2
We believe the second count looks a little better than the first. The decline of the past week looks corrective on an hourly timeframe, and that would be consistent with a wave "(iv)" rather than the beginning of a larger move down. We also believe the second count fits expected news and timing better.
We will expand more on our OEX analysis in the upcoming edition of the Market Watch newsletter, in addition to covering other equities indexes, bonds, currencies, and commodities. You can request a free sample copy of the Market Outlook using the brief form that appears on in the right margin of this page.
For those who missed last week's edition, we will also include an update on the count for Apple Inc. that has our subscribers excited. The upcoming move is sure to shake out many traders.
You can request a free sample copy of the Market Outlook newsletter at Trading On The Mark.