Saturday, 28 August 2010

13:50 BST - SPX Update - Did we see an expanding ending diagonal from 1061.45 to 1039.70?

With trading elliott waves, it always pays to know what the alternatives might be so that you can work out where a particular count that you're trading at a given time might be wrong and when an alternative count might become more likely and take you in a different direction. 

So, I've been looking at the possibility that, on the bullish counts I'm following (see charts 1 to 3 in the end of day update from yesterday) the corrections down from the high at 1129.24 did end at 1039.70 (in that update I have labelled those corrections as needing one more leg down). If the corrections are over, it would mean that we have now started on the substantial rallies that those counts imply.

It all depends, in my view, on being able to count the move down from 1061.45 as the last wave in the correction. As I said yesterday, it has the look of 3 waves, not 5. However, I think it is possible to count an expanding ending diagonal for that move, which would be a 5 wave move and a valid 5th wave to end those corrections.

Here is is close up - its based on the labelling shown in chart 1 of yesterday's end of day update:

SPX 1 min  close up: expanding ending diagonal from 1061.45 to 1039.70:

It seems to fulfill the rules of an expanding diagonal - all waves can be counted as zig zags, wave [3] is longer than wave [1] and wave [5] is longer than wave [3], the lines connecting waves [2] and [4] and [1] and [3] diverge and wave [5] ended beyond the end of wave [3].

In addtion, its said that a diagonal implies a swift and deep thrust in the opposite direction. I think yesterday's move from the low qualifies on that count.

The thing that stands against an ending diagonal here is that its said that they occur where the preceding move has gone too far too fast - personally, I don't think we can say that of the down move from 1129.24. For me, its been quite laboured bearing in mind that the bearish counts put us at a point in the wave structure where we should be seeing severe and impulsive declines (I've mentioned this as a concern for the bearish counts in various intra day posts and on the 60 min counts page over the past few weeks).

However, the count is there and, I think needs to be kept under consideration given the implications it has (a strong upside move to follow).

This way of counting the move down from 1129.24 can also be applied to the bearish counts shown on charts 4 and 6 in yesterday's end of day update.

For the main count on chart 4 it would mean that wave iii of [3] ended at 1039.70 and we would now be in wave iv up. Wave iv would have to stay below 1069.49 in order not to invalidate that count, unless the wave i low should properly be placed at 1076.69, in which case, that's the level at which this labelling would be invalidated.  

On the alternate count shown on  chart 4, it would mean wave [B] of ii ended at 1039.70 and that we'd be on our way up in wave [C].

For the main count shown on chart 6, it would mean wave [1] of iii ended at 1039.70 and we would now be at an earlier stage in a wave [2] correction than the count shown currently suggests, retracing the decline from 1100.14. The diagonal shown from the low would be a leading diagonal wave (A) rather then an ending diagonal wave (C). So, we would likely see more upside once a wave (B) pullback is complete.

For the alternate count on chart 6, it would mean that wave i ended at 1039.70 and that we'd be at an earlier stage in a wave ii correction than the current labelling suggests, correcting the whole of the move down from 1129.24. 

Returning to the bullish count shown above, here's the count on a slighter wider view:

SPX 1 min - complete (a)-(b)-(c) from 1129.24:

You can see that the move up from the low yesterday has broken above the correction channel linking the top of (b) to the start of (a). If price does not fall back within this channel pretty quickly, its going to look like  this ending diagonal down to 1039.70 is valid. It won't mean that these bullish counts must be playing out because, as shown in yesterday's end of day update and as explained above, the bearish counts do also accommodate more upside of varying degrees.

Finally, here's a 60 min chart of this count for greater context:

SPX 60 min - end of correction from 1129.24 on the bullish counts:

So, the next  pullback is going to be important. If the move up from yesterday's low is a diagonal as suggested in yesterday's end of day update, it would be a 1st wave leading diagonal on these bullish counts. That means that the next pullback cannot drop below 1039.70. If it does, this labelling is invalidated. 

However, the labelling shown on charts 1 to 3 in yesterday's end of day update requires another low, so these bullish counts would not be off the table if we do take out that low, unless we also take out 1010.91. 

Assuming we do drop below 1039.70 but do not take out 1010.91, we'd then have to start monitoring how the subsequent move up behaves to try to get an early clue as to whether these bullish counts have ended their corrections or whether the bearish counts are actually coming to fruition.