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Dorn: The Not-So-Orthodox Broadening Top

Drawing explaining Fractal fern IFS
Image: António Miguel de Campos
Drawing explaining Fractal fern IFS

In response to a number of queries, my colleague Tony Cherniawski and I have undertaken an analysis of the current structure of the $SPX.

We term this “The Not-So-Orthodox Broadening Top.”

Being a fractal with self-similarity, the broadening top has replicated itself at several degrees of trend, much like the fern leaf pictured here on the side.

This gives it the ability to extend beyond its expected boundary by repeating a self-similar pattern over and over again.

Normally, blue point 5 would be where green point (i) is.

However, with a lot of water and fertilizer (liquidity), the fractal began to grow another extension (call it a green shoot). The second extension wasn’t as strong as the first, but added an additional four months to its timeline.

dorn_chart_1_121509.jpg

The elements of a broadening top formation are not normally the same as Elliott Waves, but the green extension points could just as easily be an Elliott Wave count.

This is clearly not the traditional wave pattern.

Note that the bottom blue trendline not only gives us the boundary of the original broadening formation, but it also highlights the diminishing trading volume over time.

It is also the ultimate target for the initial decline from the top of its formation.

It is notable that there is little consistency between the green (positive) trading volume and the red (negative) trading volume on a day-to-day basis.

Finally, the third (red line) broadening formation appears.

dorn_chart_2_121509.jpg

The red broadening top formation looks like the “Orthodox Broadening Top” described in Edwards and Magee’s book, “Technical Analysis of Stock Trends.”

Not to be outdone however, a final broadening formation (black line) presents itself.

The entire process has left in its wake a series of false signals and discouraged traders.

Volume, (that tends to diminish in a bearish wedge), is erratic in a broadening top.

There are multiple false directional signals in both directions.

This is likely one reason that a number of professional traders and money managers may be throwing in the towel. Many of their accounts have been chewed up by the whipsaw movements within the pattern.

The final point 5 has reversed into what may be best described as an impulsive wave. It has been followed by a corrective pattern that could not regain the prior highs. This may well be the last gasp of a very challenging trading pattern.

If the identification of this pattern is correct, the selling floodgates will be opened once the $SPX goes below 1085.

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Dr. Janice Dorn is the only Ph.D. (Brain Anatomist) and M.D. (Board-Certified Psychiatrist and Addiction Psychiatrist) in the world who actively trades, writes commentary on the financial markets and manages a subscription-based website. Dr. Dorn has been trading the gold futures markets full time since 1993. She has written over 1000 articles on trader and investor psychology, and mentored over 600 traders and investors.She writes on all aspects of trading psychology and provides a real-time trading service on her website: TheTradingDoctor.com.