Posted on October 8th, 2009 at 1:30 PM

Most of us have been watching this extended Elliott Wave 5 in the S&P 500 for the last two and a half months wondering, "Is this finally the top?"  We've had two false breakouts the first in August and one in September and now once again we are sitting on a new breakout for the Type Two Sell.  The question is, is this the one?

To help get our answer I went back in history to the last time we had an extended Wave 5 onthe S&P 500 and did some analysis on the chart.  The chart I used was the Weekly chart looking at the Wave 5 that first appeared in March of 2005 and lasted all the way until the top in October of 2007.  Using the benefit of hindsight I tested all the breakouts along the way and noticed that every time we had a sell off of more than 5 bars the market rebounded and made new highs until the sell off in December of 2007.  As you can see on the chart below the market tried to make new highs but was resistance was held by the Ellipse drawn from the Wave 5 high to the retracement low.  I went back on all the other sell offs and drew the Ellipse in the same manner and you can see that the market went through the Ellipse's with little regard to it.  With the exception of July sell off where we tested the Ellipse but did not take out the retracement low.

Below is the December 2007 Ellipse which held the new rally, and we subsequently took out the low and started a new down trend.

Using the same type of analysis I changed the chart to the Daily and looked at the current Wave 5, notice that during the first two attempted sells we rebound off the lows, take out the Ellipse and make new highs in a similar manner to our extended Wave 5 on the Weekly.  As of today we are testing a new Ellipse which could act as resistance for this new attempted rally.  If the current Ellipse holds and the market takes out the October 2nd low, I would feel much more confident in selling this market off.  The pattern that results (if we take out the low) would be beginning Wave 1 and 2, or possibly an A and B which could finally tripa new down trend in the market.

Technical Analysis is all about history and looking at what happened in the past to try and predict future movement.  We'll see if this history lesson helps find the true top of this rally.

Ron Wheeler

eSignal Learning

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