Feb 24. SPX, Is It The Top?

In the post “SPX, How Far Will It Go?” on Jan 17 I noted the importance of the 1520-1540 confluence area – a home for two vertical count targets and the ascending internal resistance line and wrote that “odds are high that the 1520-1540 area is the final destination of the ongoing rally.” My assumption that the SPX would stop in this area was based on observations that more often than not the price takes a pause before its next directional move when it reaches a significant confluence point.
The SPX behaved exactly like that. The price achieved 1530 and plunged more than 30 points after – the biggest retracement since January. Now, I assume, that many ask themselves a question whether this is the top or just a temporary retracement on the way to higher prices. At this moment the price action doesn't give enough signals that the top is forming. Fortunately, P&F charts can provide us with objective price levels which should set an alarm when the price reaches them.
On this medium-term chart the 1470 level (rose box) is the level of significance. Should the price continue to build the current column of Os to this level, then the probability of a High Pole reversal pattern and therefore the top would increase significantly. Until then there are no signs yet that the current retracement is something more than a part of a new consolidation pattern.

This consolidation pattern (green oval) with the lower boundary at 1500 is clearly seen on the shorter-term 1-box reversal chart. Note that there is the bullish count of 1590 from the October-December congestion area in play and no any bearish count yet, so the picture remains bullish. We can get the shorter-term potential bearish count if the price breaks down decisively through the 1500 support level. Until then I am willing to give bulls the benefit of the doubt and wait and see how the price behaves.

In the Sector Breadth Model all sectors remain in buy mode supporting the bullish stance for the time being. It’s worth noting though that an improvement in breadth during the past week was registered only in the Staples sector – a defensive sector.

What worries me, however, is the increasing volatility. It doesn’t necessarily mean that prices will go down from here, but the last two times, when ATR (16) crossed its EMA (32) from below 12, led to a meaningful retracement. So, it’s worth to keep an eye on this potential crossover.