Tuesday, 24 August 2010

9:04 BST - SPX Update: 15 and 60 min charts and more on the near term bullish potential and what would help eliminate it

I mentioned in last night's end of day update the risk of near term bullish potential if a) we haven't yet completed wave [2] in the i-ii-[1]-[2] sequence from the high at 1129.24; or b) we only bottomed in wave i at the 1063.91 low and wave ii is still in progress. You can read the end of day update here.

The reason I mention this, aside from the wave count, is the behaviour of the technical indicators on the intra day timframes. I noted at the weekend (see the post here) when I had labelled the late Friday rally as wave (A) of [2], that I expected we'd see some negative divergence occur with price making a new high in wave (C) and the indicators, which should make lower lows against that high. Yesterday, we saw the high labelled (A) taken out but there was no negative divergence in the indicators, as mentioned in my posts during the day.

Now, its not compulsory to have such divergences between price and the indicators, but it does go some way towards confirming that a top of some sort has been made. So, I think its sensible to stay alert to the two near term bullish possibilities I mention above. Having said that, the intra day charts do look bearish.

Here's the picture I'm looking at:

SPX 15 min:

You can see from my comments on this chart that the indicators paint a bearish picture so support more downside to come (we'll just have to wait and see whether any such downside turns out to be a (B) wave decline or if is a 3rd of a 3rd wave down).

Its also nice how the rally into 1081.58 stopped right at the intersection between the rising lower line of the bullish green fork and the falling upper line of the bearish red fork. This seems to confirm the validity of the red fork and that the green fork is unlikely to have any influence on price (at least not bullish influence).

There was further confirmation of the red fork with the second rally into its upper line later on yesterday. You can see how price quickly turned back down from there.

I've drawn in a new downward fork in black. If we're in wave [3] of iii down, this may contain that move, with price at least moving to its median line and perhaps following it down.

SPX 60 min:

The same lack of bearish divergence between the indicators and price into the high at 1081.58 is highlighted here, but again, the indicators are bearish, both in their curent configuration and/or in their behaviour into that 1081.58 high despite the lack of bearish divergence, as noted on the chart.

In both of these charts, the current 3 wave look to the decline from 1081.58 is apparent and with one decent sized gap up or rally, the bearish picture can change quickly, which is why we have to stay alert to the possibility that this is only a (B) wave in wave [2] or a [B] wave in wave ii depending on which of the near term bullish possibilities mentioned above may be playing out. 

As mentioned in yesterday's end of day update, what I would like to see to reduce the risk of the decline from 1081.58 being a (B) wave is a clear 5 wave decline from 1081.58 (taking out 1063.91 won't be enough if we only do it in 3 waves since the decline could still be a (B) wave in an expanded flat). 

I think we've seen too many potential ones and twos forming to the downside in recent action that we now just want a straightforward impulse down without any further messing about. This would help eliminate the near term bullish potential mentioned above, though not the longer term bullish potential mentioned in the end of day update (which remain valid until we take out 1010.91).

If we're in wave [3] of iii as my labelling suggests, then ideally, we should see it extend to at least 1.236 x wave [1] of iii That would take it to about 1035. In my view, this is what the bearish counts call for, so if it doesn't happen, those near term bullish counts have to remain on the radar.