Thursday, 16 September 2010

21:20 BST - SPX End of Day Update

Today, like yesterday, we saw an early sell-off but then no follow through which means that the risk of further upside remains. Based on the wave counts, it may be fairly limited upside since I'm looking for a 5th wave or a diagonal to complete a 5 wave move from the August lows, (on both the bullish and bearish counts) assuming it didn't complete at the 1127.36 high. 

For the bigger picture on the bullish and the bearish counts please see the 60 min counts page.

Here are the charts:

Chart 1: SPX 1 min - ending diagonal from 1040.88:

The labelling on this chart relates to Option 2 (and 1 but that would be at one lesser degree) on the 60 min counts page. It shows the whole of the move up from 1040.88 as an ending diagonal for wave [C] of ii. Wave (4) didn't overlap wave (1), but the EWP book suggests that that can happen and since it otherwise looks like a diagonal, with the overlapping waves, it would seem to be OK to label it as such.

I've retained the labelling of a complete diagonal, but, since we still haven't declined significantly it remains possible that the high at 1127.36 was only wave (3) and that we saw wave (4) yesterday (this is the alternative shown on the above chart). This would mean a further high to come, above 1127.36 to complete it.  If that's the case, wave (5) has to stay below 1129.24, otherwise the [i]-[ii]-i-ii count is invalidated.

On the bullish counts, this diagonal would be a leading diagonal for a wave (i) or [i] up (see Options 3, 4 and 5 on the 60 min counts page - for Option 3, it could be an ending diagonal for the whole of the [c] wave, so that Option may no longer be so bullish).

Here's a closer look:

Chart 2: SPX 1 min - ending diagonal from 1040.88:

As you can see, I've labelled a series of ones and twos down if we assume a top at 1127.63. The invalidation point for this count is 1126.57, although a 1-2 down isn't entirely ruled out until we take out the high at 1127.36 (we'd be looking at a very ugly expanded flat/combination for wave 2).

However, as long as we don't see clear and unmistakable impulsive action to the downside,  a top at 1127.36 has to remain questionable.

For the alternate, that we are still in wave (5) of the diagonal, we have to take out the high at 1127.63, since wave (5) has to move beyond the end of wave (3) in a diagonal. However, on this bearish [i]-[ii]-i-ii count, we also have to stay below 1129.24, so there would be upside, but it would be limited for this bear count.

If there is more upside to come and we take out the high at 1129.24, then that will invalidate the overall [i]-[ii]-i-ii count. As explained on the 60 min counts page, that would still leave a [i]-[ii] count (so we'd be in wave [ii], not wave ii). However, taking out that high would, in my view, make the count for a zig zag from 1010.91 the best bearish option (which it probably is anyway given the time issue I've mentioned over the last few weeks on the 60 min counts page).

Here's the count for a complete 5 waves up from 1039.70 which would be  all or part of wave [c] of the zig zag up from 1010.91 under Option 3 (and it would be wave (i) or [i] on the bullish alternate counts shown under Option 4 on the 60 min counts page):

Chart 3: SPX 1 min - 5 waves up from 1039.70:

For the moment this count for 5 waves up from the August low could be complete at 1127.36 - we need to stay below that high and drop in a manner consistent with that high being a top. So far, the declines we've seen have had no follow through, so upside risk remains.

That arises from the alternative, that we only completed wave [3] of v at the 1127.36 high. That remains valid since we didn't dropped  below 1110.27 in wave [4] (the wave [1] of v high) as shown in this chart:

Chart 4: 1 min - 5 waves up from 1039.70 still in progress:

I've removed the (1)-(2) up labelling from earlier since I much prefer the wave [4] triangle count. That triangle could be complete as shown but we may just be in the (D) wave, with (E) down yet to come before we start wave [5] up. 

If we've started wave [5] up, we have to stay above the low at 1119.77, which I'm counting as the (E) wave of the triangle. If we have wave [E] to come, that must stay above the low at 1114.63 since in a contracting triangle such as this, wave (E) can't move beyond the end of wave (A).

Here's a close up of both possibilities on one chart:

Chart 5: SPX - 1 min close up of 5 waves up from 1039.70:

So, here's what I'm watching:

1) for the [i]-[ii]-i-ii count, we need to stay below 1127.36 if wave ii completed at that high. If not, we have to stay below 1129.24. If we take that out, this count is invalidated;

2) if we completed wave ii (shown in charts 1 and 2 above) or minor wave 2 (shown in chart 3 above) at the high of 1127.36, we need to see price action to confirm. As yet, we still haven't seen this. Taking out 1114.63 in an impulsive move might help to increase confidence that a top of some sort has been seen, but, in my view, it would have to be followed swiftly by a move below 1101.53 and then 1091.15;

3) if we take out 1129.24, that will focus attention on the zig zag from 1010.91 count and on the bullish counts under Option 4. That zig zag would be minor 2 up, as shown in the update posted last Thursday,  and its bearish once wave [c] of 2 completes. As you can see from charts, 3, 4 and 5, we could have completed it at the 1127.36 high or be on the verge of doing so, or the move up from 1039.70 could just be wave (i) of [c]  of 2.