Stock Topping Process – Part Three

On 03/18/21 the Dow Jones Industrial Average made a new all-time high unconfirmed by the other two main US stock indices, S&P 500 (SPX) and Nasdaq Composite (IXIC).  I refer to this as a “rule of the majority signal” the market condition is revealed by the non-confirming indices. In this case a bearish signal.  Additionally, both the  DJI and SPX daily Stochastics had bearish crossovers in the overbought zone. It’s  a possibility a significant top for the US stock market was made on 03/18/21. However, one piece of evidence sticks out like a sore thumb – the VIX indicator. 

My prior blog noted that on 03/17/21 the SPX made a new all-time high with the VIX  making a new one-year low.  The VIX chart illustrated four other instances within the last year in which the SPX made a top that corresponded with a higher VIX bottom. The VIX and SPX divergences of last year is not a recent phenomenon, it’s been occurring for several years, with a high probability of being correct. No indicator works 100% of the time, perhaps the recent new VIX low is a rare example of not working. We still need  to play the higher probabilities, with four out of four successful divergent signals since early 2020 chances are there could be another.

The daily SPX chart courtesy of Trading View illustrates a possible Elliott wave count allowing for another SPX all-time high.

It’s possible an Elliott wave – Ending Diagonal Triangle (EDT) is forming since the SPX  late January bottom.  EDTs are a termination pattern that appear in the fifth wave position of motive waves.  Typically, the second wave of an EDT has a very deep retracement of the first wave.  Usually 70 to 90%, note the deep retracement of the supposed Minor wave “2”.

The SPX 30- minute chart examines the structure in greater detail.

Each sub wave of an EDT subdivide into three-waves or a combination of three-wave patterns.  The supposed  Minor wave “1” is suspicious because it has the smooth characteristics of five-wave impulse pattern. I’ve learned that sometimes one of the three motive waves within an EDT can appear to be an impulse wave. 

The upper half supposed Minor wave “3” has a lot of declines overlapping with the peaks of prior rallies, a characteristic of three wave or in this case a double three pattern. 

Very near-term the supposed Minor wave “4” could continue lower. If the wave EDT count is  correct, we could see sometime next week at least a marginal new SPX all-time high.  March 23^rd and 24^th are the two most likely days  for termination of the EDT wave five.

Also, its common for fifth waves of EDTs to marginally break the trendline connecting the peaks of wave one and three.  The ideal scenario would be for a top above  the trendline and below the widely watched SPX  4,000. This could fake out the crowd that’s  expecting the  magic number to be hit.  If 4,000 is not hit, they could be waiting for years.