Monday, 6 September 2010

22:45 BST - SPX Update: Time and Price Resistance suggesting a turn?

Undoubtedly, the bullish case looks very appealing following last week's action so I thought I'd post something that might suggest that there should be at least a temporary halt to the advance, if it has any impact. 

I should warn you that the following charts are very busy and require a bit of effort but really, they're not that bad once you get over the initial confusion of a mass of lines. Just don't look at them with a hangover.

Both charts use Gann based techniques relating to support and resistance and time.

This first chart shows the SPX from the 26 April high within a grid I've constructed from a Gann based time cycle (vertical lines) that the market seems to have observed, and Gann derived price levels at which price has pivoted or congested (horizontal lines). I then drew diagonals crossing through, as far as possible, the points at which time and price crossed. 

The result is a grid showing potential turning points in time and/or price at the vertical or horizontal lines and/or the diagonals, including points at which two or more cross. The diagonals can also be used to mark out the path of trends:

SPX Daily - Time and Price:

You'll see that the vertical time lines have pretty much caught the turn dates - see yellow circles. It was early at the May high, but that early turn seems to have resulted from price rising up to the red dotted diagonal which price had already hit on its first attempt to recover from the intial drop from the 26 April high. That diagonal did subsequently form the upper line of the down channel that price stayed within for most of the decline to the July low.

From the July low, price moved within the diagonals highlighted in purple and from the August high, it pretty much stayed within the diagonals highlighted with the black dotted lines.

It now seems to be moving up within the channel delineated by the diagonals I've highlighted in green.

We're now at the upperline of the green channel and approaching the next time line on about 10 September. We're also approaching a point where two diagonals cross as well as one of the horizontal price lines - see the turquoise circle.

All of this together seems to suggest a reversal coming up. 

The two diagonals that cross in this area, do so at about 1113/1114 on 9 September. The diagonal that forms the upper line of the green channel crosses through the time line at about 1116 and there is the horizontal price line at about 1121. The upperline of the green channel is at about 1108 on 7 Sept and about 1110 on 8 Sept. Coupled with the time points mentioned in my update in relation to the 60 min counts page on Saturday and the update to that page itself, which suggest a possible turn date of 7 Sept, this gives a range for a turn date of between 7 and 10 Sept.

Of course, you shoudn't just short simply on this basis. You need to see some price action that confirms a potential top. For example, at the flash crash low in early May there was the gap up the next day, while at the July low, there was the large bottoming tail candle, the high of which was traded above two days later.

The reason its important to wait for price action to show a reversal is because its perfectly possible for price to just keep moving up above the upper green channel line, to the next diagonal above it, and so, widening the channel for this up move (you can see that this happened with the drop from the April high to the early May low on the way down).  

This is a risk to consider given that just above the turquoise circle you can see that on this 10 September time line there is a point where its not only crossed by a horizontal price line at 1141, but there is also a cross of two diagonals - see the green square. Potentially powerful time and price resistance if price were to get there.

This next chart uses the Gann fan with the 1x1 line drawn across the top of two pivot highs in order to find levels of future resistance. Its not the traditional method of drawing the 1x1 at a 45 degree angle, but it was effective during the uptrend in identifying support - obviously, the 1x1 lines were then drawn across two pivot lows.

There are six different fans (I've removed most of the lines associated with each which are not currently relevant - yes, it could have looked alot worse):

SPX Gann fans from 26 April:

Now, it may only take one or two fan lines to provide resistance to a move. For example, the the rally into 13 May stopped at resistance from only one fan  line drawn from the 26 April high and the high on 29 April. The rally into 21 June stopped at resistance from two different fans. 

So, with 6 different fans suggesting resistance at or not too far above where we are now - well, you'd think it would mean something, especially when coupled with the price and time resistance that we're approaching as illustrated on the first chart above.

Still, as I've tried to emphasise, its crucial to wait for a reversal signal in the form of price action and until we see that, the bullish move that was started last week must be given the benefit of the doubt.