Wednesday, 18 August 2010

12:16 BST - SPX Update: 60 min pitchforks and technical indicators

You'll remember from the 15 min chart I posted yesterday (see the last post here - it has links to the earlier posts) that we saw some nice bearish divergences in the standard technical analysis indicators against price as we moved into yesterday's highs. Coupled with the potential resistance from the upper lines of the blue and green forks and a possible complete elliott wave count, the signs were that we would get a turn down in price.

The position with the indicators is not so clear on the 60 min chart:

SPX 60 min pitchforks:

The RSI and stochastic are turning down, but there hasn't been any obvious bearish divergence against price at the peaks that these indicators  made yesterday. The same applies to the MACD histogram. That formed a substantially higher peak yesterday than the peak it made in what I've labelled as wave [A] of ii. Within that higher peak, the bars did start to print lower highs, but that was consistent with the price action, not diverging from it.

The turn down in these indicators on this time frame may be sufficient in the context of a 2nd wave within a 3rd , to mark the end of the 2nd wave correction. However, I think it sensible to be aware of the potential risk that the end of the correction won't come until these indicators print divergences against price, which means that we may see a higher high in price than yesterday before this 2nd wave is over.

This would fit with the alternative count I have, suggesting that the drop off from the high yesterday may only be wave (4) of [C] of ii (you can see this on the 1 min close ups I posted during the day and also in the charts posted in the end of day update). There is a further alternative that could lead to new highs - we did complete a single zig zag yesterday, but the drop from the high is all or part of an [X] wave before a second zig zag higher.

What we're seeing in the indicators on this time frame (or rather, what we're not seeing) could also fit with the bullish counts (see the last two charts in yesterday's end of day update), where we are in the 4th wave of an impulse up from 1069.49 and which is part of a larger impulse up from the low of 1010.91.

As I said in the end of day update, for the bearish count, to preclude the alternative of a further high to come, based on the way I've labelled the [C] wave of ii, we need to drop below 1089.05. However, to preclude yesterday's late sell off from being a 4th wave on the bullish counts, with a further high still to come, we need to drop below 1082.62. The next level down is 1075.16 - taking that out would certainly enhance the bearish case and would make the second zig zag possibility less likely (though we'd need to take out 1069.49 to be sure it wasn't playing out).

This is just something to be aware of given that the 60 min indicators don't seem to have shown the usual divergences we would expect when a top is made.