Squawk Morning Briefing: What is Topping Action?

We have talked frequently over the past few weeks about “topping action.” Many folks who trade, and especially those who comment on markets like to say that “topping is a process,” and that conveys an important distinction between typical tops and typical bottoms in equity markets. Tops can often be long, drawn-out affairs when compared with bottoms which may be sharper and “V-shaped.”

From an Elliott wave perspective we have certain wave patterns which announce the end of moves: triangles which are corrective waves which always appear as the next-to-last wave in a sequence; and ending diagonals which are the last move in a sequence. While triangles are corrective waves moving against the trend and ending diagonals are motive waves in the direction of trend they share similar features: both are made up of three-wave moves in both directions and they can be long, drawn-out affairs which chew up lots of time.

We haven’t been able to identify either pattern conclusively in the patterns of the last couple of weeks but the nature of the moves has us continually looking. When we see behavior that has us wondering if we might not be in one of these two patterns because we can’t find clear impulsive behavior in either direction near a move up which might be complete then we have topping action.

That doesn’t mean a top is in place as tops can take a long time to develop. It also doesn’t mean that the top will develop as the behavior could morph into something else. But for now, we are overbought, in a situation where a top is expected nearby, and experiencing wave structure that suggests the market is ripe for a decline.

As always, confirmation is needed first but everything suggests we need to be on the lookout.

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Elliott Squawk delivers thorough market preparation every morning in time to take action during the trading day. By combining up-to-the-minute futures activity with traditional end-of-day analysis from cash indices, you receive analysis based on the latest conditions as the trading day sets to open. Each issue of Elliott Squawk goes beyond traditional Elliott Wave analysis because we recognize that trading Elliott Waves is much more than just looking at the most likely current count. Squawk will prepare traders to assess the market action as it unfolds by answering questions that any Elliott Wave trader should consider:

• What price levels and wave motions would confirm an expected move?
• What price levels would make an alternate scenario more likely?
• What technical indicators should be watched throughout the day to interpret wave action?
• What intermarket movements merit special attention to understand likely price trends?

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