Friday, 27 August 2010

10:26 BST - SPX Update: The technical picture on the 60 and 15 min charts - setting up to diverge again on a new price low?

The 60 and 15 min charts are suggesting more downside to come, but also that we may see bullish divergences between price and the technical indicators on any new price low. This would be consistent with the main bearish elliott wave count which has us likely in wave [5] of iii down from the 1129.24 high (see yesterday's end of day update). So, any new low below 1039.83 today would be wave [5] of iii of and once that's complete we 'd expect to see a bounce in wave iv:

SPX 60 min:

The notes on this chart tell the story that the indicators and price seem to be conveying to us (you can see the last post on this chart here).

I really like the way that the RSI was unable to get above 50, and the CCI was unable to get above -100, despite the size of the rally from the 1039.83 low. I also like the way that the MACD came back up to test the broken green trend line from below and appears to be failing there - all occuring below the zero line. All of this seems to confirm that the rallies have been countertrend (even though they may not seem like it).

However, you can see from the notes on the chart that we could be setting up for bullish divergences in these indicators against any new low in price. That would be consistent with the main bearish count where I'm expecting a wave [5] of iii low and then a rally in wave iv. That would be in line with my reading of the behaviour of the -DI line making lower peaks, and the ADX line now moving more sideways than up while the -DI is above the +DI. That's consistent with a weakening in the downtrend.

SPX 15 min:

The 15 min chart  (you can see the last post on this here) paints a similar picture - its always good when different timeframes line up.

Again, the warning signs of a potential low of some sort are building - the directional movement indicator is probably doing this most prominently at this stage, with the lower peaks in the -DI and the ADX.

The blue pitchfork that I drew in off yesterday's high may have gained some validity with that late rally testing its upper line and failing there, but we need to see more confirmation that this may be an important fork to watch by seeing price drop to its median line (taking it out of the green fork).

Although I've said above that these charts are consistent with what is expected on the main bearish count, its important to be aware that its also all consistent with a potentially more significant low being formed on the bullish counts. You can see details of these counts on the first three charts in the end of day update from 25 August.

On those counts, any new low below 1039.83 would mark the end of the corrective moves down from the 1129.24 high so the next move up would be the start of a significant rally if any of those counts is actually playing out.

We should get a clue as to whether or not we're seeing something other than a countertrend rally following any new low today, by watching the behaviour of the technical indicators as price rallies. On countertrend rallies, the indicators should behave in the way I've described in the charts above and in the previous postings of them. Its not conclusive and different timeframes can give conflicting views, but if the indicators start to behave more bullishly, especially if we see this across timeframes, then its a warning that the bearish counts may be under threat.

Of course, if we don't get the divergences that appear to be setting up, and the indicators instead just confirm any new price lows, then things may be rather more bearish than the main count suggests.