How Market Tops are Formed

Below is the chart I showed in my post of March 13 ( Top of the Correction at Hand):

Here is the same chart, one month later:

Breaking below the lower trend line is a strong indication that the top for this correction was made on April 2. The rallies over the past week are normal reactions to the new downtrend (if that is what we have). Often, a reaction rally will go back up and touch the trendline it just penetrated. Don’t ask me why, it just does. Ralph Elliott, the empiricist who postulated the Elliott Wave Theory, said it isn’t necessary to explain a market phenomenon. Observing it is enough.

Tops are diffused. The market starts down and then rallies to lower highs repeatedly because bullish sentiment prevails even though there isn’t much money around to drive the market higher. Today, investors and their advisors are fully invested and institutional portfolios have almost no investable cash on hand. The sentiment readings indicate the majority of investors are as bullish as they were at the October 2007 top. This is normal during a secondary high. Buying into it, or remaining invested here will be a hugh mistake.

The economic data is also coming in upbeat because social mood is driving both the market and the economy. We anticipated this back in ’09, when I wrote that I expected a rally and a recovery in the economy. Back then, the majority of polled investors (70%) were extremely bearish.

For perspective, here’s a look at the monthly chart of the S&P 500:

The Elliott Wave forecast is for a full retracement of the entire 1980-2000 bull market. We’ve got a long way to go.



The author makes no representation as to the accuracy of the quoted material, but believes the sources to be reliable. No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

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