Signs of a Distribution Top? SP500 and intraday Elliott Insights

Aug 5, 2010: 12:34 PM CST

Taking a close look at the intraday price action of the S&P 500, I think something very interesting is happening.

Let’s take a close look at the recent price action and see if we can glean any insights from the Elliott Wave principle – not so much in pure wave counts but in the broader distinction between a “Corrective Wave” and an “Impulse Wave.”

S&P 500 5-min chart:

Click for full-size image

Without getting too deep in the weeds on the chart, I want to call your attention specifically to the difference between a classic Elliott Wave “Corrective Wave” and an “Impulse Wave.”

In broad terms, impulse waves are sharp, often unfold in 5-wave progressions, and show clear motion on the chart with very little “price-bar overlap.”  Impulses – particularly on intraday charts, often move in the direction of the higher timeframe trend (say, daily chart, etc).

In contrast, corrective waves are more ‘complex’ in form (not always clear), contain many price-bar overlap and have a three-wave structure.  There are many types of corrective patterns – zig-zags, flats, triangles, doubles, triples, etc.

In working with Elliott Wave, I feel it’s far more important to assess whether the price swings are impulsive or corrective, rather than trying to impose a pure count over the chart, but that’s open for debate.

Theory aside, to me at least, the market right now has shifted short-term to a downward phase of impulsive waves down and corrective counter-waves up -probably starting with yesterday morning’s sharp sell-off.

In one of the most confusing facets of Elliott Wave to new traders, corrective waves can push to new recovery highs (as when a “B” wave exceeds the high of a Wave 5).

It looks like that could be the case here – at least in terms of the market pushing yesterday to a new high in a corrective fashion as opposed to an impulsive fashion.

In other words, I’ve highlighted what appear to be “Impulses” (sharp moves down with little to no price-bar overlap that take on a 5-wave structure if you look at the 1-min chart) and “Corrections” that move up in lots of price-bar overlap and complex corrective fashion.  They’re even bound by clear rising parallel trendlines – common in many corrective phases.

Anyway – this is just an observation of mine and it will be interesting to see if the market continues this pattern and does turn-tide to the downside after giving an early warning in a shift FROM an impulsive rising move over now to an impulsive move down.

A lot of trading comes down to reading the chart and then seeing if the market behaves as expected (as the chart indicates) or counter to what the chart evidence suggests – which results in busted patterns and Popped Stops and sometimes a BIGGER move in the opposite direction than market participants expect – as they’re forced out of their positions (stop-losses) on an unexpected move.  It looks like a breakout to the upside would be unexpected by many, many traders.

It’s one of the hardest things in trading to spot a pure turn in trend the moment it happens, but this is one of the ways that Elliott Wave can be helpful in doing so.

But we’re traders – not analysts, so we take this information, process it, realize its bearish nature, and then prepare IF/THEN statements, meaning we’ll trade long on a price breakout above 1,130 assuming the market/traders/investors react well to Friday Morning’s Jobs Report which most likely will be a big market mover up or down and break us out of this pesky range we’re in – at least it’s a catalyst that has the power to do that.

Be prepared for a big move tomorrow – either way.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

7 Comments

7 Responses to “Signs of a Distribution Top? SP500 and intraday Elliott Insights”

  1. KumoBob Says:

    Good to see you EW guys have my back on this.

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  4. tempest218 Says:

    Even if the market sells off tomorrow, a close above 1130 on the S&P in the near future is guaranteed by “Dow leads” theory. The Dow broke above the June highs (resistance) and the S&P will follow. It never fails, so regardless of tomorrow, which could just as easily be a meaningless small gap followed by whatever the market makers want to do on light summer volume, the market is bound for higher highs. Just watch.

  5. Hellogmk Says:

    Some wave count on a larger scale.
    http://realmarkettrend.blogspot.com/

  6. Stock tips Says:

    Nice post i am very impress with you.

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