Friday, 30 July 2010

11:07 BST - SPX Update: Something for the Bears

You'll see from the updates I've been posting (the latest was in last night's update) that there is a case for counting a corrective double zig zag move from the 1 July low as complete as at the high of 1120.95.

This 60 min chart (sorry, there's alot going on on this chart) does look rather bearish in support of that:

Firstly, we've got the pitchfork (orange lines), which has halted the advance so far, firstly to end wave w of the double zig zag, and, for the moment at least, to end the presumed wave y. 

Second, we've had the bearish cross of the 13 and 20 moving averages. Yesterday afternoon's rally tested the falling 13ma and failed. However, both those averages and price are above the 50ma. For the bearish case to gain momentum, we need to see them all drop below that 50ma.

Third, the RSI (14) is showing strong bearish divergence against the price highs at w and at y and the late rally yesterday, strong as it seemed, failed to move the RSI above 50.

Fourth, The MACD histogram has diverged against price pretty much throughout this move up. The MACD itself also shows definite bearish divergence against the w and y price highs.

The ADX line, which indicates the strength of a trend (the direction of the trend being determined by whether the green +DI line is above or below the red -DI line), was definitely weaker on the move up from x to y than it was on the move up from (i) to w. I like to see the ADX above 25 to indicate a strong trend - it barely made it above that figure on the rally from x to y.

If this is a corrective move (and not the very bullish alternative I showed in the last chart in this post) the blue correction channel should contain price. If we fall significantly below the channel, assuming we've had a complete double zig zag (and not a single zig zag which is being followed by an X wave) that ought to signal the end of the correction. However, the manner in which it falls will be important - it has to do it impulsively.

Possible signs that there may be more left in the rally:

- The MACD is still above the zero line. If the rally is over, it needs to drop below;

- The Slow Stochs is moving up. If the rally is over, it may not get too far above the 50 line.

Overall, the signs on this chart are more bearish than bullish. It doesn't preclude a further high (causing more bearish divergences) if the single zig zag is the relevant count. You'll see from last night's update, that count still looks like it needs one more new high above 1120.95. But this chart perhaps suggests that any new high may not get too far above the 1120.95 level. 

Let's now see if price can fulfill the bearish expectation, or will the bears once again grab defeat from the jaws of victory!