Thursday, 12 August 2010

11:50 BST - SPX Daily Chart Update

Yesterday I posted a 60 min chart of SPX which showed that the bearish signs that had been appearing on it since around the end of July (click here to see how it looked at the end of July) based on standard technical analysis had finally manifested themselves in price action.

Here's the daily version of that chart:

SPX Daily pitchforks:

You can find the last posting of this chart on 7 August by clicking here. I've left most of the comments on the chart as they were at the time I last posted it since they set out the issues that there seemed to be against the bullish case and which may now be playing out in price action with yesterday's decline.

Since I last posted it, those bearish signs have got worse, so the bearish case seems to be asserting itslef against the bulish signs that were mentioned in my 7 August post:

1) the CCI has made a definite turn down from the zero line (the failure to get above it despite the undoubted extent of the rally in July seems very bearish);

2) price, which had resumed its crawl up the lower line of the blue fork and appeared to be trying to make it to the midline of the upward dark green fork, has now completely backed off both. The failure of price to get to the midline of the dark green fork during the last push up which resulted in the choppy sideways action we saw earlier this month was a sign of weakness (I mentioned this in the 7 August post). Price is now coming down to the lower line of the dark green fork and the midline of the downward red fork. If we're going to get follow through to the bearish case, those will be broken to the downside. Otherwise, we could be in for more choppy action;

3) the MACD histogram, which had been diverging bearishly against price  for some time, went negative yesterday signifying a bearish cross in the MACD itself. The similarity between the behaviour of these two indicators now and what they did prior to the April top remains: the histogram diverging against price while the MACD itself rose, suggesting underlying weakness despite the rising MACD line;

4) the RSI, having continued to fail to get to the bullish level of 66.67, has now fallen back below 50, possibly confirming that the July rally was countertrend. Really though, we want to see the RSI get to the bearish level of 33.33 and stay down there if the bearish case is to play out;

5) the stochastic has a triple top in place.

Despite yesterday's large decline, the indicators suggest there is alot more room to the downside - this may well be confirmation that its the bearish counts that we should see play out over the next few weeks. 

However,  remember that bullish counts remain on the table. The main one I have isn't invalidated until we drop below 1010.91 - see last night's update for more detail and the links to which it refers.  So really, for the bearish case, we're going to want to see price take out that level before the indicators start to show bottoming signs or even bullish signs ( I should also mention that the bear case is not sealed even if we drop below 1010.91 - you can see from the chart on the "Impulse from March 2009" page and the alternative counts on the charts on the "Zig zag from March 2009" page that those ultimately bullish counts are not eliminated by taking out that level).

Of course, it may be too much to expect a straight line drop even if the bearish case is playing out. As mentioned in my post of the 60 min version of this chart yesterday, there are signs that we should at least be prepared to see a bounce of some sort. The current elliott wave counts would tend to support this as you can see from last night's update, though its feasible that we decline more before a proper retracement. As mentioned in one of my 1 min chart updates yesterday, if yesterday's drop is wave [3], it would be a 2.618 extension of wave [1] at about 1081. At the moment that wave is somewhere between the 1.618 and 2.618 extension levels. It would be nice and neat of we could get to the latter. 

When we do get a bounce, we'll need to monitor it to see if we can get an early warning that it might be something more bullish than a normal retracement in a downtrend. I identified some levels to watch in last night's update which might help on this, assuming the count shown is correct.

So, we had a nice decline yesterday which has given some credence to the bearish case. However, with bullish possibilities still very much alive, this is no time for complacency on the bearish side (not that there is ever a time for complacency in the market). Trading is a process of continually monitoring and adjusting as price action develops and not taking anything for granted.