Friday, 12 November 2010

21:13 GMT - SPX End of Day Update

A strange thing happened this week - we actually had some downside follow through. In addition, its possible to count 5 waves down from the high at 1127.08. Yes, I know its not the best 5 waves down and it also counts well as a double three. Still, with the possibility that its 5 waves down, there's a chance at least that we've put in a top for the rally from the August low.

There are various possibilities for what this top may be - the ones that I've been following are set out on the 60 min counts page. The count shown as Option 2 would be pretty bearish if we have topped. Under Option 3, there are three interpretations, as listed, with varying degrees of bearishness, but two are ultimately bullish.

Its also possible, however, whether looking at Option 2 or Option 3, that the high at 1127.08 is only the 3rd wave of the rally from the August low, so following some very near term downside (which may, in fact, be over today), we'll see another rally that will likely take out the 1127.08 high before the August rally is complete. This is shown on Chart 2 on the 60 min counts page and as the alternate count on Chart 1 below.

Here's the close up chart I've been posting showing the move from the 1227.08 high:

Chart 1: SPX 1 min - close up:

As you can see, the main bearish count has us completing wave [1] down. This could come with the next decline below 1194.08. As stated in the blue note on the chart, we may have bottomed at today's low. However, looking at the move up from there, it looks very corrective at the moment, so the odds favour that we have a further low to come.

If this is correct and we see a decline that starts to look out of proportion in the context of  wave (5) as a whole, then the possibility referred to in the green note on the chart may be in play. This would have us in a subdividing wave (5) (this is actually what I labelled in yesterday's end of day update) which would be a little more bearish than the main labelling.

The other alternative for the bear count, which would be even more bearish, is referred to in the red note. It suggests that we had a wave [1] low at 1206.04 and that the high that I've labelled as wave (4) would actually be wave [2] so we'd now be in wave [3] down. If this leg down were to get to about 1181 (a 1.618 extension if wave [1] is at 1206.04)  and the next retracement stayed well below 1206.04 and we then made a further leg down, then I'd certainly look at this more closely.

The bullish count shown by the alternate labelling assumes that the high at 1127.08 was only a 3rd wave in a 5 wave rally from the August low and that we're now in or completing the 4th wave. We'd then see a further rally above the 1127.08 high. The bigger picture for this count is on Chart 2 on the 60 min counts page.

I think if we start to break above the 1219 area on the next rally, then the chances increase that we saw a 4th wave low on this bullish alternate. That area is where I'd expect a wave [2] rally on the bear count to stop. If we see a 5-3-5 up into that area and  then stay above the high of the first 5 waves up, that may give an early warning that the bullish alternate is playing out (since in an impluse wave, the high of the first 5 waves up has to hold on the second retracement (which would be the 4th wave of the impulse) whereas if its a wave [2] correction, that high would quickly be taken out once the 5-3-5 is complete).

Here are the 10 min charts of the bear and bull counts shown in Chart 1 above, just for some context:

Chart 2: SPX 10 min - bear count:

Chart 3: SPX 10 min - bullish count:

So, this is what I'm watching:

1) if we're in wave 4 of (5) as the main bearish labelling suggests, I want us to stay below 1203. If we don't, I'll start to think that we bottomed in wave (5) and, therefore, wave [1] at today's low;

2) If we stay below that level and drop from here, I'll be on the alert for the end of wave (5) and [1];

3) if that decline starts getting out of proportion to the rest of wave (5) as labelled, I'll be thinking that the subdividing wave (5) alternative (green note) might be playing out or, that we had a wave [1] low at 1206.04 and would now be in wave [3] down (red note);

4) if this current rally or the next one makes a 5-3-5 up into the 1219 area, I'll be watching the next move down: if it stays above the high of the first 5 in that sequence, I'll consider it likely that the bullish count is playing out with a wave (iv) low made today or at the next low. So, I'd be looking for the high at 1127.08 to get taken out.

Have a great weekend!