Sell in June for the market swoon?

We are now moving into a target region that I provided over a year ago when we were trading within the 1250-1300 region. While I was not positioned long in the S&P 500 for the move this week, I have said before that I am willing to sit out this rally, unless a low-risk entry developed, as the downside now seems to be of greater risk than missing some of the upside. However, I do not see the top as being in place just yet, and it may take several more weeks until this wave is completed.

With the move up we saw this past week, it made it clear that the last pullback was a more shallow corrective wave than I wanted to see in order to enter a safer long in this market. But as I have been saying in our trading room over the last week, the drop on April 23 has given me issues with how to appropriately count this last structure, and has made me much more uneasy about trading the upside.

As many of you know, I get much more conservative when I do not have a count upon which I can confidently rely, especially if that is within a 5th wave, and would rather sit out a market move in that case. While that may anger some, I would rather remain in cash and miss a final move than be positioned wrong and lose money, especially since there is always another bus coming if we miss the current one. In fact, there are many traders that only wait for a larger degree 3rd wave to trade, and sit out a 5th wave entirely.

So, for now, we have moved into the target zone we set well over a year ago for a potentially meaningful top in the market. And, as I said in a market update this past week, when we do these wave counts, we want to see the technicals match up to the counts to confirm our larger degree wave counts. We know that the heart of the 3rd wave usually shows us the strongest technicals, and we can see that the heart of wave iii of (3) of 3 exhibited the highest RSI point on the daily chart. It followed with the top of wave iii providing negative divergences, and the top of wave v of 3 providing even further divergences, with the peak of the RSI in that section being the 3rd wave of wave v of 3.

As we are now coming up into our long-term target box for the SPX, we can clearly see the negative divergences that have developed in the RSI, which is what we see in 5th waves. Furthermore, when you see the VIX positively diverging, as we now do, that is another sign of a 5th wave.

As for the 5th wave count, again, as I have mentioned before, the April 23 spike has caused me some problems with the count, but it seems that the wave iii of (3) was not very large, as we currently have it counted. Since we usually see wave iii of (3) provide a significant extension, when it does not, it usually means that wave v of (3) will be the larger extension, which will display the stronger technicals.

This is why I am counting this current rally as wave v of (3), which has not yet completed. In fact, the ideal target for this wave (3) would be the 1622-1627 region. But I will need more confirmation over the next week to make certain that the technicals will confirm this count, and then we can start looking for further smaller degree confluence for the significant top we would expect up in this region.

As for larger degree confluence, note that wave 1 of this current structure, which began last November, was approximately 100 points. And since this 5th wave began around 1535 in the cash index, a Fibonacci 1:1 relationship between waves 1 and 5 would provide a top in the 1635 region.

But before I call that as a top, I need to see how the structure and technicals develop over the next week. Of course, we can still see extensions take us up to the higher Fibonacci extension around 1672, which would be where the 5th wave would be equal to 1.382 times the size of wave 1, but, again, I need to see how the structure develops over the next week to have more confidence in a topping confluence point based upon multiple wave degrees. For now, 1594ES and 1575ES are the primary support levels for the current rally phase.

As many of you also know, I do not trade a market based upon correlations. But there is something that I am seeing when reviewing many different markets that is worth noting, so I want to take a moment to address the focus that many have on the emerging-markets move off the bottom, as well as the strong rally we see in Japan. When I look at both the iShares Inc. MSCI Emerging Markets Index Fund EEM +0.14%  and iShares MSCI Japan Index Fund EWJ -0.42%  charts, the one thing that I see them having in common with the S&P500 is that they are all looking to be topping soon, but in different degrees of waves.

Whereas the EEM seems to be completing a wave i of a c-wave off its recent lows, the EWJ seems to be completing a wave 3, along with the S&P 500. The important information that I glean from these charts, when viewed from an overall perspective, is that each of these charts will be looking for a pullback in the not too distant future — the S&P 500 and EWJ a wave 4, and the EEM a wave ii. This would then set them all up for three more waves higher to complete their much larger patterns into the spring of 2014; EWJ needs waves 5 of (3), (4) and (5), EEM needs waves iii, iv and v, and the S&P 500 needs waves a-b-c for wave 5 of its large Ending Diagonal.

All of this is not even mentioning the fact that AppleAAPL +2.38%  may be resurrecting as a potential "market leader" once again, as we are also now tracking AAPL for a top in a wave 1 off its lows. This would also leave AAPL needing 3 more waves for completion — waves 3, 4 and 5.

So, while I am looking for a larger degree pullback potentially starting later in May, or even as late as June, I still see the potential for all worldwide markets to see much higher levels, with the EEM potentially setting up the more technically powerful move coming up into later this year, which makes it a prime candidate for a buying opportunity on its wave ii retracement.

See charts illustrating wave counts for the Emini S&P 500, INX, EEM & EWJ.