With several U.S. and European stock indices tracing potential topping patterns, a jolt to the markets this week could lock in a market top. The event that triggers the next cascade of market corrections could come in any of several forms - for example a new stumbling point on the road toward a Greek agreement, or a poorly received statement from the Fed or E.C.B. Here we show some of the indices we're monitoring, as well as developments that traders might view as signaling of the next downward move.
The S&P 500 may have put in a truncated fifth-wave high earlier this year, potentially completing the entire climb up from 2009. A downward turn after this week's bounce could lead to a test of the lower channel boundary and eventually could produce a test of the October 2014 low. If that type of reversal transpires, market bears might begin to aim for targets in late 2015 and early 2016 that are even lower than that.
We see similar conditions in the German DAX. After blazing a potential downward leading diagonal and a smaller upward retrace, the index that is the darling of market bulls is now poised to embark on a strong downward third wave. In this case, traders might aim for the 50% and 100% harmonic lines of the channel, perhaps to be followed by area of the October low.
On a faster chart with daily candles, the Russell 2000 Index and its best-known ETF show how a topping pattern may be complete. Since the high of early June, IWM has broken out of its price channel and may now be ready to start the next downward wave.
Would you like to get timely notifications of trading opportunities? Let us know if you'd like us to send you some examples of our subscriber-only posts. For readers who contact this week, we'll also send updated charts of the S&P 500, which is displaying a different and potentially bearish pattern.