S&P, VIX, and Shanghai Dow

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Since the market made higher highs, I think the best way to view the pattern in the S&P is in the last leg up of a triangle pattern. It is following pretty close the green projection line from this prior post. I am certain that many traditional Elliott wavers view what I have labeled as C, D, and E? as and ABC or a W-x-Y-x-Z up from the March low. In any case, I think the Elliott wave experts generally agree that a major top is close at hand.

From the "looks" of it, I would say the market will probably push modestly higher for a couple weeks. However, from a technical and sentiment perspective, I believe the stage is already set. It is just a matter of seeing a larger, faster correction than any during this advance since March to confirm that a larger degree top is in place.

DMI and Aaroon show reasonably strong trends in place, but basically every single daily oscillator is blaringly divergent on this move to new highs. Coupled with the post crash high at 1044ish and a doji in the cash S&P index today, it certainly would not surprise me if the market makes no further head way from here.

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The chart above is the VIX. Many will note the divergence in the VIX not making new lows as the indexes make higher highs. That has occurred several times on this rally, without meaning too mcuh. Although it does look different this time in that the VIX is basing at the 25 level rather than trending down or making quick sharp spikes up. The green lines indicate the wedge that many are watching to indicate a possible breakout to the upside in volatility.

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The is the Shanghai (Chinese market) Dow. I show this simply for the fact that it has been leading our indexes at tops and bottoms for more than a year, and also because based on some historical comparison to our market, what happened here might be what we should expect in our market.

In July our market shot way up and trended extremely tightly for a few weeks. The precedents similar to that kind of complete lack of mean reversion for that long, basically showed markets that were able to continue higher for several weeks, but then had most or all of the gains of that trend erased in sharp corrections. In the case of the Chinese market right now, this played out as well. All the gains from early June to early August were wiped out in about 2 and a half weeks.

In sum, as it stands now for longer term traders, I would be looking for entry any time on bearish trades. If you are holding bullish positions, then I would definitely suggest having stops in at last week's lows and also consider trailing them in some fashion if the market does move higher in coming days.

For shorter term (swing style) traders (excluding day traders), I would either avoid any new bullish trades, or only enter if there is a pullback this week that holds above last week's lows. And use those lows as a stop. For the top pickers (myself included) I would jump on any classic top reversal candlestick patterns with stops above the high of the pattern.