Tuesday, 24 August 2010

21:14 BST - SPX End of Day Update

In my post earlier today I summarised the bullish counts I'm following and which remain valid until we take out the low at 1010.91. You can see that post by clicking here.

So, I'll concentrate this post on the bearish counts. You should refer to the 60 min counts page to see the context of the shorter term charts I'm showing here and to understand what the Options referred to below mean.

On all of the following counts, I'm assuming that we will get 5 waves down from the high of 1081.58.

The main count is that, from the high at 1129.24, we've seen a i-ii-[1]-[2] down (using the degree labels applicable to Option 2), as illustrated on this chart:

SPX 1 min - from 1129.24, a i-ii-[1]-[2]:

At the moment, the count has us in wave [3] of iii. I would hope to see wave iii end somewhere in the region of 1003 where it would be a 1.618 extension of wave i. However, more modest targets might be the 1.236 extension at about 1026 or the 1.382 extension at about 1017. Wave iii should, ideally, break down well below the channel I've drawn on the chart.

In the meantime, once we get 5 waves down from 1081.58, that will mark the end of wave [3] of iii. We would then be in wave [4] of iii up. We'd have to stay below the wave [1] of iii low at 1063.91 in such a retracement, otherwise the count would be invalidated. So, on this count, the retracement following the completion of 5 waves down from 1081.58 would be relatively modest.

If the 1063.91 level were to be violated in an assumed wave [4] retracement, that does not mean the end of the bear case. There remain other ways to count the decline from 1129.24 on the overall bearish counts. It may be important to be aware of them in case we do invalidate the above count as described and also because if they are in fact the correct counts for the decline from 1129.24, they could determine the level to which retracements may get once we get 5 waves down from 1081.58.

Here are the other counts I'm following:

1) SPX 1 min - from the 1129.24 high, a i-ii, with [1] in progress, or still in wave i:

There are two possibilities shown on this chart as you can see. 

If the first one is playing out, once we make 5 waves down from 1081.58, that will complete wave [1] in a i-ii-[1] sequence. We would then be retracing the decline from 1100.14 in wave [2].  It could go all the way back up to 1100.14 without invalidating the count, but maybe more likely we'd see a 50%-61.8% retracement which would be the  1074 to 1080 area, depending one where we bottom.

If we invalidate this count by moving above 1100.14 in an assumed wave [2], it may be that the second count shown is playing out. On that count, once we have 5 waves down from 1081.58, we'll have completed wave i down from 1129.24. This means we'd be looking at a retracement back up in wave ii. That could go all the way back up to 1129.24 without invalidating the count. However, we'd probably expect a wave ii rally to end in the 50%-61.8% level which would be about 1085 to 1097, depending on where we bottom. 

2) SPX 60 min - from 1129.24, a leading diagonal for wave (i):

The labelling on this chart uses the degrees from Option 3.

I posted this chart earlier today. So far, it remains valid since we haven't moved below 1045.35 in what I've labelled as wave v of the diagonal.

However, as I mentioned in the earlier post, if the decline from the wave ii high at 1100.14 is still part of wave iii, the level that would invalidate the diagonal would be 1040.39 because that would make wave iii longer than wave i. So, really, to invalidate this possibility altogether, we need to take out 1040.49 in the decline we seem to have resumed at the end of today.

For the moment, it seems possibly more likely that we may still be in wave iii given that we haven't seen much of a retracement up since the low at 1046.68 and a retracement following the completion of a diagonal is meant to be sharp. However, it may be too early to draw this conclusion. If we take out the low labelled v and (i) then we can switch over to that.

Once we complete the diagonal, assuming we haven't already done so, as mentioned, a sharp retracement should follow. A level of 78.6% is considered normal after a diagonal. If we did end the diagonal at 1046.88, such a retracement would take us up to about 1112, so if this count is playing out, a wave (ii) retracement up to that level is certainly something that could cause doubt to creep into the bear count.

For now, going back to the main count shown in the first chart above, here's a close up:

SPX 1 min close up:

Sorry - that's the best I can do with that wave (4) at the moment! Still, I think it works. If its correct, we should now be in wave (5) of [3] of iii down if you refer back to the slightly bigger picture shown on the first chart above. We could see a low to this somewhere between 1045 and 1040 (the 1.236 to 1.618 extension of wave (1) of [3]). It could extend further, in which case a possible target might be the 2.618 extension of wave (1) at around 1029. Let's just hope it doesn't truncate instead of giving us a nice 5 waves down from 1081.58, since that would only cause (more) confusion.