S&P 500 Topping Pattern – Playing Hard To Get, But Close At Hand

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Topping patterns are notoriously difficult to identify with picture perfect precision, and anyone who says otherwise is not being completely honest. There are a host of reasons, but from an Elliott Wave perspective, one reason is that there are multiple Fibonacci levels the index can extend to and react from. More often than not certain Fibonacci extension levels solicit a reaction, which is why we tend to take a half position short at these fib extension levels using shares of the ProShares TR/Short S&P 500 (SH), or the ProShares UltraShort S&P 500 (SDS), and then add to this position once we have a confirmed high in place.

The move off the Christmas 2018 low best counts as a WXY pattern for a B-wave. In English, this means our expectation is still for a move down to the 2,351 to 2,154 region for a C-wave to complete Primary Degree wave 4. However, until the 2,866 level is taken out to the downside, we are expecting a final move up into the 2,918–2,935 level to complete the entire B-wave move up sometime this week or next. So, if this analysis is correct, we should see the SPX begin to break down in the coming days. See the 15-Minute SPX Chart below that shows our concluding upside projections. A break below 2,866 could nullify this expectation and would change our upside count, and more likely indicate that the top is in.

S&P 500 15-Minute Chart

S&P 500 15 Minute Chart

Note that while our expectation is for new lows to occur, we will be watching the retrace levels in the 2,616 to 2,470 region to act as support. If this price zone holds, it could represent either an overall A wave of the move down to our target region, or could represent the entirety of the retrace against the move up from 2,316. So, we will be looking to cover shorts in this region and go long. If it holds as a wave 2, the move up should be impulsive and enable us to hold long positions for new highs. If it meanders in typical B-wave fashion and is unable to take out upside resistance, we’ll look to exit and go short again.

For now, we have made several attempts to short this topping action, once we exited with a small profit, and another with a small loss.

S&P 500 Daily Chart Target Expectations

S&P 500 Daily Chart

Attempting to hedge long portfolios, or position for larger downside moves takes perseverance and patience. While markets can provide plenty of clues, until downside support confirms the top is in, the approach should always be to attempt entries and utilize extremely rigid risk management until enough downside support gets taken out to confirm that the top being in is highly probable. Many investors do not attempt to take these short positions, as they are not always clear on where to exit. Many others will await a break of support to enter. However, we tend to like to position early, as once downside support begins to get taken out, many times it’s too late to catch a tight risk to reward entry.

Note also that our Hurst Timing suggests that the SPX is currently in the epicenter of the topping region, and can top inside this week or next. An additional clue to confirm a top will be when the SPX begins to take out the FLDs (Forward Lines of Demarcation), as shown on the Daily SPX Chart below.

S&P 500 Daily Chart With Hurst Timing Indicators

S&P 500 With Hurst Timing Indicators

Concluding Remarks

  • The S&P 500 has been in the topping region for several weeks now, continuing to push higher on negative diverging technical.
  • We are looking for a top this week or next in the 2,918 to 2,935 region, with an outside chance it could extend to 2,979.
  • The closer the SPX gets to the prior high, the greater potential there is for an overall Primary Degree 4th wave flat, which would take it back to the December 2018 low.
  • Positioning short during market tops takes patience and perseverance. There is no “sell” alarm, and many times by the time the top is confirmed short positions could be well in a profit position.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Looking to go long shares of SDS