Longer Term Pattern Analysis on SPY ETF - A Major Top Possibly Forming 9-22-16

SPY ETF is Forming a Possible 5th Wave Up and Creating Longer Term Bearish Divergence

Click on the chart of SPY above to enlarge the image.  But there is a pretty nice Fibonacci type sequence developing here.  I have put labels 1,2,3,4 on the chart with an implied 5th wave up to new highs expected using an Elliott wave interpretation.  And if wave 5 is then 38.2% of wave 1, it would project SPY to 225.50ish (projected up from the September low).  Based on the duration and relations of the other price waves, it would seem that the Oct 6th time frame would be a nearly ideal end to the sequence.

From a charting standpoint, the suggested price move in that time frame would lead to a break above the upper channel line of the April to August highs.  And from a technical analysis perspective it could make a massive multiple time frame bearish divergence in the MACD - monthly, weekly, and daily all in bearish divergence.  I have learned that those set ups are significant.  Even if a major top does not end up forming, I would guess there will be a significant correction after such a set up.

From a smart money perspective, we have seen the smart money become aggressive sellers since the move to new highs in July.  Price has not made much headway since then.  If we continue to see increased smart money selling as prices push higher, and price then breaks below the September low, that would be suggestive that the bearish forces have won this battle.

However, when large short positions are accumulated by the smart money, and the opposing players are able to push price several percent above the valuation/battle zone, it may force a short covering by the smart money.  That scenario can lead to major price gains in the market, and often in pretty steady fashion.

But then the scenario is that once the short covering is complete, the stage would be ripe for a major top.  I highlighted such a scenario in 2011 in the cotton market.  Given the large potential "basing period" since May 2015, a short covering rally could take the market much higher.  So I am not hanging my hat on one outcome.

Any short attempted at a quality set up would need a defined stop loss to protect against such a scenario.

But for now, my expectation is that prices will trend higher for the next week or two before another short/inverse set ups "ripens".

Pete

SPY Multiple Time Frame Stochastics Short Set-Up

Click on Chart to Enlarge

Currently SPY has broken out of the small triangle shown in yesterday's post.  It appears set to test the 198.40 harmonic zone.

As I type, there is a developing multiple time frame stochastics set up which appears to be setting up an ideal short as price reaches this harmonic zone.

• 5 min overbought
• 15 min overbought
• 30 minute overbought
• 60 minute likely overbought later this afternoon
• Daily nearly overbought today; possible overbought tomorrow

So if signs of bearish divergence on the 60 minute and under time frames show up without last Wednesday's high being exceeded, that seems to provide a low risk entry for a short position with a possible stop above Wednesday's high.

Even if Wednesday's high is exceeded, the multiple time frame analysis still suggests that the short term is basically overbought within a weekly time frame downtrend where stochastics has not yet become oversold.

Remember the FOMC announcement tomorrow.  This will likely bring some volatility into play tomorrow afternoon and beyond.  

Pete