Still Topping...

What - Still Topping? Sounds ridiculous - but I think we are still in a topping process. Remember this rally was huge - 440 points in 7 months (roughly 63 points a month non stop). It is unlikely to reverse without a decent struggle. It is more likely to consolidate in a broader range and regroup for the next wave, and I think that is consistent with the price action over the last 20 days.

Right now, what we are seeing now is a nice distribution effort that started around 1100. Smarter money selling into the dip buying as we roll over. I don't see a panic sell-off - which means there is more distribution to come - but at higher prices. That is why I think we are still topping. The buying on the Thursday GDP number shows there are sufficient participants who are willing to stay on the ride. This provides more distribution opportunity for the smarter money. More importantly, I do not see a proper topping pattern on the daily chart - YET. However, I do see the obvious head and shoulders pattern forming on the daily. This pattern would imply a test of the 1017-020 zone followed by one last counter rally to as high as 1080. If rejected at 1080ish, we would see the an actual correction begin - including tests of several prior lows. Open the chart:



I've crudely drawn the right shoulder. If this shoulder is to materialize, we should see some down action on Monday with a reversal starting Tuesday. Don't expect a picture perfect sequence of events - rather look for the broad manifestation of the pattern over the next 5 or so sessions. If we see the shoulder form and get rejection, we can expect tests of the following lows:

A: 1019 (Most important failure is here - complete retrace of last rally leg)
B: 991 (Complete retrace of the prior rally leg)
C: 978 (Major milestone as this break would lead to the biggest portion of the correction)
D: 869 (The lowest low that I would expect in the correction)

So what happened to 920? Why isn't in the diagram? The answer is as follows. If we are in fact reversing, the focus needs to be on the lows that were set during the rally upwards because those lows are the freshest tests in the minds of the bulls. Another words, the psychology of the participants is still rolling over. Only after confidence is completely broken do we switch to the "support" model. That does not mean that price action ignores support - in fact we are sitting at support near 1030 now. We'll see price action slow as we descend at the following levels:

1017-1019
960
920 (Biggest test of support)

The 920 test is the biggest test for several reasons:

1. It is right around the 200p MA
2. It has the broadest ceiling and was the site for the longest consolidation period in the full rally.
3. It is the 62% retracement of the first rally after consolidation.
4. It is the bottom band in the dense upper price action region - below this band, we have a major density gap down to 880. That is a 40 point gap - though it is through the price May -July price consolidation.

In my next post, I'll address the hourly chart and see if I can't present some trade setups for the coming sessions.

It is good to be back - thanks for all your comments while I was traveling!