What Does Topping Look Like?

With the market taking the direct path higher today, allow me to explain what I am looking for to signal a top to a wave 2 retracement.

With the rally today, the structure suggests that we are in the wave iii of the [c] wave of 2.  But, within that wave iii, the pullback we are experiencing as I am writing this update suggests it is wave 4 within that wave iii.  And, as long as the market holds the 2875SPX support, then that is how I am counting this rally. 

This means that I am expecting a higher high to complete wave 5 of iii, followed by a day or two long wave iv.  You see, wave ii in this structure for the [c] wave was almost non-existent.  And, based upon the theory of alternation, it suggests that wave iv should take a long time.  For this reason, I am expecting a wave iv to take us at least a day.  And you can see my expectations on the 5-minute chart posted below.

The warnings that go with this structure is that the market “should” be holding the 2870/75SPX support at all points here.  Should we see a break down below 2870, it would suggest that either the market is going to trace out an ending diagonal for the [c] wave, or it has completed wave 2 in a w-x-y fashion.

So, as long as the market maintains over 2870/75SPX support, I am looking for two higher highs, with an ideal target in the 2920SPX region. 

Lastly, while it is still “possible” that the market can take us to a marginally higher high towards that 3000 region, I don’t see that as the most likely scenario at this time.  It would take a break out over 2930SPX to suggest that potential.  But, as long as we remain below 2920/30SPX, I am viewing this rally as a terminal wave 2, which will be pointing us down strongly into the end of May, and potentially through June.

1SPXdaily
1SPXdaily
60minSPX
60minSPX
5minSPX
5minSPX
Avi Gilburt is founder of ElliottWaveTrader.net.