Has the Rising Wedge on SP500 Broken Downwards?

Apr 20, 2009: 10:13 AM CST

Here’s the question on everyone’s mind – did the S&P 500 officially break out of its rising wedge pattern this morning?  Let’s look.


(Click for larger image)

A quick look says “Yes,” but always keep a close eye on the risk, and the possibility that this break could be an insidious ‘bear trap.’

The trendlines have converged to form a bearish rising wedge pattern with an official break, though bulls have been resilient in the face of overhead resisatnce, overbought oscillator signals, etc.

The implication is that price will break-down hard out of this pattern, whether one takes a classic technical analysis outlook, or a more complex Elliott Wave projection.

In Elliott terms, there’s debate over whether this is an “Ending Diagonal” or a “Leading Diagonal” which I posted in a previous update.  Either way, the next likely swing would be a down-swing, and it has the potential to be a violent one.

Let’s keep watching this closely for signs of continued impulse down, or let’s see if bulls can overrule this powerful technical sell-signal.

Corey Rosenbloom
Afraid to Trade.com

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Comments
  • Andrew Stanton
    Yes, W ended at the January high and X ended at the March low. The move down from Jan to Mar was a clear three and that is why that low was not wave 5. It is still possible to count the November low as wave 5 but the action since then becomes difficult to explain except as either a wave 2 of one bigger degree (per Bob Prechter, ugh!) or something like the 1998 low that to this day remains a mystery to me in Elliott terms.
  • Andrew,
    If the diagonal was the terminal subwave of Y, can you tell me your ending dates for W and X? Do you have X going from Jan 6 to Mar 6?

    I have the diagonal as the terminal subwave of (4), going from Mar 6 to now. For my part, I suspect this all of (4) and there won't be an X (or another X, in your case), but we'll see.

    I am looking for a three-wave structure down at least, before I sell the short-ETF bought at S&P 868 or so. If you're right, as of today we're at most into b of xx (or x) and there should be at least 1 more impulse down. And even that would be a pretty fast x, considering that a, b and c took around ten trading days each.

    If I'm right, maybe we'll see (iii) of i of (5) down.
  • Charles Upton
    Prechter is smart, but his target of DJIA 400...yikes. If it even gets close, we might be thinking more about guns/ammo than buy signals.

    charleS
  • BoboM
    Corey:

    I don't subscribe to the STU. I was under the impression that those in the wave 4 camp are more bearish than Prechter because they believe wave 5 down is yet to come, whereas Prechter maintains it is already over. I don't know what his downside targets are for the DJIA and SPX.
  • Rob,

    That's what I figured Mr. Prechter's count was.

    I wasn't sure what your context was - thank you for sharing.

    I'm one of those "believe it when I see it" in terms of such a devastatingly bearish count. I tend to think of the ramifications of a final target using the "We just finished Primary 1" count. His target as I understand it is 400 on the Dow Jones (I haven't heard his S&P; target).

    I try to be neutral and respectful and open to all possibilities but such a target just isn't in my vocabulary at all. If it happens, it happens but it would mean life and the markets as we know it would be changed forever and I can't see that happening.
  • Don,

    Yes, it feels that way, doesn't it? Having to snag a quick profit to the shortside before it disappears! My, how things have changed.

    That 200 would indeed be a reasonable target. Good call.
  • BoboM
    Corey:

    As far as Robert Prechter is concerned wave 5 of [1] down ended with the early March bottom and I am inclined to agree with him. However, I know some technicians are not in agreement. We then embarked on wave 1 of [2], which I assume just concluded. Consequently, I believe we are now in wave 2 of [2] which should be an A down, B up, C down (to a lower low) correction. This should then be followed by wave 3 of [3] up move.
  • Don-Da-Mon
    In other bear market rallies the s&p would often reach the 200 MA. Hence, I'm looking for an A-B(now)-C up to that. Someone stated or I read that this recent rising wedge often has a large retracement. Hence, looking at about 750 as a 61.8% retracement before entering long for the measured move to 940ish (the 200 MA). It just seems to be fitting perfectly into this scenario. From other comments,posts, counts it seems just a matter of whether or not 750 will hold or not. Hang onto SDS till then? I took the profit today, but I jump at any profit these days.
  • Andrew Stanton
    Kevin we agree, that is why bullish was in parenthesis. The diagonal was the terminal sub-wave of Y and does not preclude the correction from continuing just as you describe with another X and then Z. You have to look at the nature of the selloff in terms of volume, price action, advance/declines, etc and the developing Elliott structure to decide if this is a continuation of wave (4) or the start of wave (5) down.
  • Andrew,

    Just for the record, I'm not bullish. My preferred count is that we just finished (4) of the larger impulse down (C?) and that now we're in (5) down.

    My question was, I see an a-b-c for (4), but could this be an x followed by another a-b-c up for a continuation of (4)? Some of my Elliott Wave reading suggests that the ending diagonal precludes the latter possibily (i.e. we're definitely in (5)).

    Went all short last Thursday and was rewarded today. Trying to figure out whether I need to take the profit quickly, from an EWA perspective.
  • Rob,

    I'm not sure I understand your count. Feel free to expand.
  • Andrew,

    Haha - that sort of captures my sentiment. I began sending bearish charts pointing out all the divergences and resistance and then concluded the analysis by saying "So my recommendation is to buy because price is poised to move higher!" Tongue in cheek of course, but we did get a higher close last Friday.

    Now the bearish signals finally kick in.
  • Kevin,

    Corrections are notoriously difficult in Elliott Wave. I don't claim to be an Elliott expert, so I'll have to punt the "Xs" and "Triples" and "Doubles" to more experienced Elliottician readers.
  • Abe,

    Officially (behind the scenes) I'm still toying with the wave count but to me I'm far more concerned with the next likely swing. That's how we make our money - by trading the next swing as we interpret it, and not by brilliance in forecasting/analysis.

    Through various discussions, and because the fundamentals as I understand them don't support a roaring bull market launching from these levels, I'm more inclined to the "We're in Wave 4" Camp instead of the "We finished Wave 5 and are now in Primary 1 of a new bull market" camp.

    But I'll trade it swing by swing.
  • BoboM
    Primary 4 was over on January 6. We are now in wave 2 of [2] of B up.
  • Andrew Stanton
    Still a little too early to know for sure that Primary 4 is over but I now think it was a double three W-X-Y with wave Y consisting of a zig-zag A, flat B, and ending diagonal C. That last rally just doesn't count well as the required five in a C of a flat. The only reasonable "bullish" scenario now is Kevin's, that Primary 4 turns into a triple three. Now that I said that the market will probably explode on the upside!
  • Corey,

    I've read that you won't get an ending diagonal in wave C followed by an X wave leading to a double zigzag or double three -- does this match your view?

    Kevin
  • Abe
    Hi Corey

    I was sure that 666 as the final 5th way of this bear market was your preferred scenario, seems i missed out when you did the change
    to a more bearish approach
  • Andrew,

    There's at least one count that would argue that we are in primary W1, mainly if one believes the March lows was the end of a 5-wave sequence that ended the "C" Wave. I don't buy the count just yet.

    I'm more of the thought with you as it is an ending diagonal, part of a corrective W4 perhaps. Most likely wave C of primary 4.

    To your credit, you called this in earlier comments as the pattern was forming, predicting a sharp downside break and follow-through once the pattern completed. Major respect for that.
  • Andrew Stanton
    A leading diagonal is always the first wave in a sequence so for this to be one means either the prior rally was one degree higher or that was some wave 1 (660s to 840s). Today's price action however is exactly what one would expect to see after an ending diagonal.
  • Anon,

    I wouldn't put it past the bulls to shrug this break completely off - or find it as a marvelous buying opportunity.

    Even a natural (not life-altering) pullback would be expected and healthy. I don't see why bulls just don't take a few profits here and if they're so bullish, wait to buy back in on a natural retracement/pullback.

    Continuing to push higher and higher relentlessly will force a more nasty 'snap-back' deeper retracement when buying pressure (demand) is exhausted on this swing.
  • Anonymous
    the volume on break appeared weak. almost seems like it is just forecasting where the break will be
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