Tops can be hard to pinpoint given the tendency for higher highs or repeated rally attempts. Sometimes however, technical
clues to tops show up in multiple ways.
Looking at the S&P 500 (SPX) daily chart we witnessed SPX hit the top end of its uptrend price channel, then retreat, which isn't unusual. You could view this action as the index 'throwing off' an overbought condition. However, the index was struggling to maintain closes above what I consider to be a key trading Moving Average, the 21-day.
When the intraday high, on two strong back-to-back rally days, ran up to the line of resistance highlighted in the 1472 area, there was an immediate retreat from there. Moreover, this second rebound was on LESS 'relative strength' than what had come before as seen in the Relative Strength Index (RSI) indicator. This is seen in the RSI line coming up to a distinctly LOWER peak than its prior high; we say that this is a 'failure' of relative strength. The light blue down trendline on the RSI indicator shows this in a visual way.
Note that SPX has come down today to support implied by its up trendline.
There was another minor clue to a possible top was provided by a relatively high bullish sentiment reading (1.8) seen above on my lowermost (CPRATIO) indicator on the SPX chart. If enough traders were 'technically' aware let's say, they wouldn't have thought that the rally 'failure' that just transpired was something justifying an uptick of bullishness. You have a trading EDGE if you have some chart/indicator understandings.
Naturally, the Dow 30 (INDU) was mirroring quite well or even more distinctly, a well-defined line of resistance and the same bearish price/RSI divergence as seen in the Dow daily chart below. INDU has also pulled back to its up trendline and this may be a place where the Dow has at least a minor rebound.
You might recall this next chart, that of the Nasdaq 100 (NDX), from my weekend Index Wrap from two weeks ago, reflecting the Close as of Friday, Sept. 28th. I reproduce this chart below. I had then highlighted a bearish 'flag' pattern.
A bear flag like this often leads to a further down leg, but usually quite soon after it (the flag pattern) forms. Instead NDX had another little head fake higher and got up to 2850 before coming down, as seen in the following chart which is up to date as of today (10/10/12).
After touching resistance implied by a minor up trendline at 2850 in the Nasdaq 100 (NDX) and exactly in the area of the prior downside chart gap, a decline followed. Overhead 'gaps' often act as resistance.
There was then a second bearish downside chart gap the day following the sharp retreat from the 2850 intraday high. Sort of a second 'confirming' bearish downside gap. The inability of NDX to achieve two consecutive Closes above NDX's 21-day moving average was a sign that NDX was losing or not able to maintain upside momentum. Losing momentum leads to FALLING momentum in these situations.
And naturally enough, the Nasdaq Composite (COMP) had the same chart pattern that traces out a down-up-down correction or what (Elliott) Wave theory would call an a-b-c correction. COMP, like the big cap Nas 100 Index seen above, has also fallen to the low end of its broad uptrend channel. Stay tuned on the ability for the Composite to rebound from the 3050 area.
Typically, the 'c' portion of the decline or the SECOND down leg carries further than the first sell off. Time will tell of course on whether this pattern repeats here. 3000 looks like a logical next downside pattern but if in bearish strategies I'd be likely out the exit door. Especially with an RSI reading almost back to an oversold area in terms of the 13-day RSI.
Last but not least as far as the big cap Nasdaq 100 index is the pattern that's been or is being traced out by one of the key tech bellwethers and Apple Computer (AAPL) is as 'key' as tech bellwethers get.
Not surprisingly and showing how similar price/indicator patterns are seen repeatedly at correction junctures, AAPL mirrors NDX in terms of its last rally going up on less relative strength. The stock has fallen back to its up trendline and this could represent substantial technical support.
Conversely, a decisive DOWNSIDE penetration of this trendline would be significant and set up a possible test of 600 support, or a bit lower, such as to or near the prior downswing low around 570.
I used this chart example of Google (GOOG) in a prior Trader's Corner article (9/25/12) but prices here are now updated to today (10/10/12) but with the same chart highlights I had from earlier.
So-called parabolic arc patterns reflect very strong, even 'bubble' type rallies, where the advance ends up going into a straight-up type move. Such super strong climbs are always unsustainable at some point, often if not usually WHEN an arc drawn up through the various lows goes VERTICAL. A moderate correction or even a major correction such as seen in a straight-down move follows.
GOOD TRADING SUCCESS!