Multiple Time Frame Analysis on SPY

Weekly


The general up-trend is still very much in tact on the weekly chart. According to EW theory, we have only completed waves 1,2,3 and maybe wave 4. It is also possible that we are in the middle of wave 4 which is really an ABC correction.

If the former is true, we should see wave 5 to continue upwards. However, since wave 5's are generally the shortest, the up-trend is drawing to an end rapidly and we can expect a consolidation or a significant correction fairly soon.

I believe the former scenario is less likely because that would make wave 4 and 5 too short. Wave 2 was four weeks long and both waves 1 and 3 spanned over two to three months. We can expect to see similar numbers for waves 4 and 5. This would put the end of wave 5 in early next year. I believe this makes a lot of sense because this could coincide with a poor holiday retail sales results, which could serve as a catalyst for the end of this up trend.

Thus, the latter scenario, which assumes that we are in the middle of wave 4, which is an ABC correction, is more likely. I believe the waves A and B are over and wave C has begun which could take us down to perhaps the $102-103 level before continuing the move up.

Daily


The wave pattern is harder to discern on this chart, but the key points below show why I believe that we should see a wave C down or the end of wave 5 from the weekly chart.

There is significant divergence between the various indicators and the price. Firstly, the volume has continued to decline while the price has continued to climb. The Stochastic oscillator made a bearish reversal yesterday which followed through today. Finally, the NYSE breadth trend has also reversed in the past couple of days. All this points to a bearish outlook.

Intraday


The most important factor on this chart is the huge resistance at the dark red line. We have bounced off there four times in the past few days and the last time we tested that resistance and failed to break it, we fell about 7 points on the SPY. In the last two days, we again tested this resistance, created a double top, and then today sold off more than 1%.

Also on this chart, the various MA on the chart made a reversal at the end of the day today. Although by itself this is not a good indicator, when mixed in with a double top, this is indeed very significant.

Summary
Keeping the long term view in mind, we must acknowledge the fact that we are probably still in an uptrend. However, rarely have the bearish stars aligned so well that all three charts, the weekly, the daily, and the intraday, are showing bearish signs.

If we do sell off in the next few days, it is most likely this sell off will only be a correction to the overall up trend and people will buy the dip again. However, as I have already said, there is a possibility that wave 5 ends here, in which case the sell off could be very significant indeed.