Tuesday, 31 August 2010

14:07 BST - SPX Update: 60 min chart

On Saturday when I looked at the 60 min chart of SPX, I highlighted the behaviour in the technical indicators that  suggested that however bullish the price action appeared to be on Friday, the technicals did not seem to be painting the same picture.

I noted on the chart in that post the sort of things the bear case needed to see and all of them have pretty much occurred with yesterday's action.

You can see this in the updated 60 min chart:

SPX 60 min:

The notes on the chart are self-explantory and identify the further action we would need to see from these indicators to confirm the weakness in the market seen yesterday.

I've also noted on the chart a couple of concerns that may undermine the bear case, at least temporarily:

There is a little bit of a worry that we didn't see any negative divergences between the indicators and price when comparing the high of 26 August and the higher high on 27 August. That raises the risk of another high above 1065.21 being necessary in order to achieve such divergence before the bear case can continue. 

As I've said before, divergences aren't compulsory, but they are often seen at tops and bottoms and help to identify them as such.  A higher high would fit with the count shown in Chart 6 of yesterday's end of day update, as well as the bullish count on Chart 1 of course. So, if this is what we see, it may increase the odds that one of these counts is playing out. If we fail to take out the 1039.70 low (preferably early on in the session), that may be the first sign that more upside above 1065.21 may be on its way.

Even if we don't rally up to take out the high of 27 August before making a new low, the indicators again look like they are set up to diverge positively against any new low in price. As noted on the chart, this would be consistent with the main count on Chart 4 and the alternative shown on Chart 5 of yesterday's end of day update which call for a 5th wave down now, as well as the bullish counts on Charts 2 and 3. which require a [C] or (c) leg down to complete their corrections. 

So, on any new low below 1039.70, I'll be watching for positive divergence between price and the indicators since it  may be a warning of an imminent turn back up in price as happened on Friday (after Thursday's session, the same positive divergence potential had set up and a substantial rally followed - see this post).

So, the lack of follow through to Friday's bullishness was a plus sign for the bear case. However, the bullish counts calling for varying degrees of further upside remain intact, so, as I said in yesterday's end of day update,  it remains a matter of monitoring the levels that elliott wave logic tells us will rule out various counts as price action develops and seeing what we are left with (I identified the levels I'm watching on the counts I'm following in that update)