A quick breakdown of how work should help to clarify the concepts contained in this analysis. The principle states that, in a bull market, markets rise in a series of 5 waves up, followed by three waves down. These five waves up and three waves down combine to make up larger waves which follow the same pattern (5 up, 3 down).
Long Term Trend Analysis
With that in mind, we take up the analysis of SPY beginning with the intermediate uptrend which began in November 2011 and ended in May 2013 (starting at blue wave 2 and ending at blue wave 3). During this time period, SPY rose from below $110 to nearly $170 in a series of 5 up waves (labeled in yellow).The top of this intermediate rally reached the upper boundary the trend channel. The last time prices reached the top of the trend channel on a 5 wave count was in April 2011 (at blue wave 1). The decline that followed formed three minor down waves over the next 7 months (purple waves a, b, and c) and took prices to the bottom of the trend channel.
Current Downtrend is "Intermediate" in Significance
Because we have reached the end of the third intermediate wave of the bull market (blue wave 3), we have reason to believe the downtrend which began on May 22 will be on intemediate significance. The probable range for this decline is illustrated by the light purple triangle.
Support at $153 is the first, and most conservative, downside target on the weekly chart. It intersects the lower boundary of the in February 2014. Below $153, a more aggressive target for support lies between $146.25 - $148.75 and intersects the uptrend line in October/November 2013.
Looking for Short Entry Points
The decline from $169.07 on May 22 to $155.73 on June 24 (purple a) appears to be the first wave of a three wave downtrend. Traders should refer to the beginning November and the hourly chart beginning May 22 in order to identify prices at which to sell short.
Summary of Overhead Resistance
I've got my eye on four resistance levels to use as potential short entry points.
From June 4 and 5 lows
From 50 and 20 day moving average and May 9 low
From the hourly chart. See below.
From the minor downtrend drawn across the May 22 and June 18 tops.
Visit my blog post for charts and brief discussion on overhead resistance.