The S&P has twice run into the 1130 area and fallen back, and is getting close to a third test. We have been in a trading range between 1040 and 1130 since last May (after the flash crash) with a momentary spike down to 1011. A triple top will signal a reversal down.
In looking at the market in a Fractal Finance fashion, triple tops or bottoms almost always characterize the end of a trading range. The fourth or B wave triangle is a classic example, and is a continuation pattern of the larger trend. The occurrence of a triple top or bottom at a different position creates a reversal pattern. The classic head & shoulders is a variant of this phenomenon, as is the diamond pattern. Many have spotted the potential for a head & shoulders type of triple top combining the Jan high (1150), the April high (1220) and a retest at 1150, if we go that far; but the current pattern instead suggests resistance at 1125-30 and then a drop. Recently we had a triple bottom at 1040 which at the time I commented should signal a reversal up, which it did.
Although the triple top/bottom per se has not been a part of orthodox wave theory, the triple top/bottom was a major topic in tonight's STU from EWI. They point out how it has marked major tops and bottoms since 2000:
- The top in 2000 with peaks in Aug 99, Jan 00 and Apr 00
- The top in 2007, with peaks in July, October and Jan 08
- The bottom in 2002, with bottoms in in July, October 2002 and March 2003
The most dramatic of these is the 2002 bottom, which Zoran Gayer called the Iraqi War Triangle:
(As a comment on Zoran's wave count, he had not yet matured his thinking, so posited a wave 2 triangle and expected a drop. Wave 2's do not have triangles, so shortly after this he advanced his theory to encompass the triple bottom pattern as a trend reversal, not a continuation.)
According to the STU, triplets typically come after a long move, such as the runup to 2000 or the drop into 2002. Sometimes these triplets form a diamond pattern, a common technical reversal pattern that is more general than the head & shoulders.
In Fractal Finance this is a way of describig the core fractal of the market, of a Thrust (the long move) and a Plateau (the trading range around the top or bottom). The plateau forms a range that could be drawn as a box, and often has a False Break along the way, which is spike outside the box that is quickly reversed back into the box - the "head" in the head & shoulders or the middle of the diamond in that pattern.
This thrust & plateau can be contrasted with the V shaped reversals of the sort we saw in March 2009, but that can be understood as part of a larger plateau on a bigger time scale. Time scales can confuse. The V shaped reaction is the False Break at a larger scale. The bottoming process in 2008-9 formed a plateau at a higher level (around Dow 8K), then shot below and reversed back up. It wasn't until after the July 2009 bottom that we finally bifurcated out of that range.
At an even larger scale, the market has so far formed a double top around Sp1550 as part of a large trading range from 1999 to now. That range is the plateau following the very powerful thrust up from 1982. One implication to keep in mind is that Fractal Finance would suggest we do not go to appreciable new lows before running up to test the old highs around 1500 one more time; indeed, more likely we hit and bounce off the bottom of the 2000-2010 plateau at around Dow7500. This third top is not required but the triple top is commonplace. Timing is not imminent, given the seven year gap between the first two peaks, but may be what happens if we have a powerful rally into 2012. This is a different perspective than orthodox wave theory, and would suggest the ultimate bottom is after 2012.
In the near term, the Dow has come right to the downward trendline that connects the April high and the August high, and sits at the 78% retrace, about as far as it should go under the STU wave count. The S&P has shot above the trendline, apparently to close a gap. A reversal back below the gap (1110) would make an exhaustion gap and could signal a reversal. Any appreciable move higher would make the STU have to reconsider their wave count.
From a Fractal Finance point of view, however, the most likely scenario is a retest back to the 1127 area. Interesting is that Carl Futia, who uses a variant of the box or plateau approach, expects the market to run into the 1127 area and hit resistance. He then expects a break down followed by a move up towards 1300. Again, Fractal Finance would instead expect the reversal to continue down.
All in all, the next few days should provide a good test of Fractal Finance against orthodox wave theory as well as the bullish Carl Futia's box approach. The timing for the triple top and bifurcation down under Fractal Finance remains the autumnal equinox around Sep 23.