Wednesday, 14 July 2010

22:11 BST - SPX Update

On the counts that imply the rally from the 1 July low is a corrective one (Options 1, 2, 4 and 5) I showed completed double/single zig zags at yesterday's high in last night's update.

On the count that places us in a 5 wave move off the 1 July low (Option 3), which would be part of a larger correction up,  I labelled yesterday's high as wave (iii) of that advance, so we would now be in wave (iv).

The Options are the different ways to count the move down from 1219.80. There are 5 that I'm following and they are set out on the 60 min counts page.

Today's action doesn't yet tell us whether the rally from 1 July has completed a corrective move or whether its only all (or maybe, part) of a larger correction up.

Here's how things stand after today:

Option 1 - Wave (ii) of [iii] topped at 1131.23

15 min chart:

Five waves down from 1131.23 on this Option represents wave i of (iii) of [iii] of minor 1. The double zig zag I have labelled from the 1010.91 low would be wave ii of (iii), so implies a wave iii of (iii) decline to follow.

The 1099.46 high is the invalidation point for the completion of wave ii on the double zig zag as labelled.

I've labelled a (1)-(2)-1-2 to account for today's action. The invalidation points are today's high, which would eliminate the 1-2, and then yesterday's high, which would mean that we didn't top at 1099.46.

Option 2 - Wave [ii] topped at 1131.23

15 min chart:

For this Option, five waves down from 1131.23 represent wave (i) of [iii] of minor 1 down. The double zig zag up from 1010.91 would be wave (ii) of [iii], so, assuming its complete, we would be in wave (iii) of [iii] down.

On this chart I've labelled today's high at 1099.08 as a truncated 5th wave to complete the double zig zag. This is because the retracement of the decline from yesterday's high was very deep (94.1%) so could easily have been a truncation, even though a 94.1% retracement is a perfectly valid 2nd wave (.941 is the square root of .886, which is the square root of .786, which is the square root of .618, so its not just a random number).

However, at the moment, my favoured count is the one shown on the chart of Option 1 above.

The count shown on this chart is invalidated above 1099.08.

Option 3 - Wave [iv] of an ending diagonal completed at 1131.23

15 min chart:

For this Option, 5 waves down from 1131.23 to 1010.91 could be  wave [v] of a leading diagonal down from 1219.80 and, therefore, minor wave 1.  

It places us now in minor wave 2 up.  I've labelled the start of 5 waves up from the 1010.91 low, on the assumption that we will get a zig zag type move up for wave 2, since we  would be retracing the whole decline from 1219.80, not just the drop from 1131.23.

I'm showing us having completed wave (iii) of what I'm assuming at the moment will be a 5 wave move for wave [a] of minor 2.  This would mean the next pullback will be wave (iv) of [a]. This count would be invalidated if that assumed wave (iv) were to fall below 1028.74, the wave (i) high.

I've labelled today's action as wave w of an anticpated combination. It looks like it could be a flat for wave w. Wave y could be a flat, zig zag or triangle - we'll have to wait and see.

The alternate labelling assumes that the 5 waves down from 1131.23 is only wave (a) of [v] and that the retracement back up was wave (b). Assuming its complete, we'd now be in wave (c) down and the count shown on the chart of Option 1 (or 2) would likely be in effect.

Remember, if there is further downside  to come, we must stay above 999.83 for the leading diagonal count to remain valid. 

Option 4 - Wave [b] of minor Y within intermediate (X) topped at 1131.23

15 min chart:

For this Option, 5 waves down from 1131.23 would be wave (i) of [c] of minor Y and the double zig zag up from 1010.91 would be wave (ii) of [c].

However, as mentioned previously, counting a complete 5 waves down to 1010.91 does bring in the possibility that wave [c] of Y is done so we have also completed intermediate wave (X) - see the 60 min counts page. That would put us now in a minor wave A rally and eventually take us to new highs. If wave (X) did end at 1010.91, then the impulse wave I have labelled on the chart of Option 3 would apply here.

For the moment, I've assumed we are starting wave (iii) of [c] down with a (1)-(2)-1-2 from yesterday's high. Watch the 1099.08 and 1099.46 levels for invalidation.

Option 5 - Minor wave X within intermediate wave (X) topped at 1131.23. Now in minor Y down

15 min chart:

On this Option 5 waves down to 1010.91 would be wave [a] of minor Y down and the retracement would be wave [b]. If its over, we would now be headed down again in wave [c] to complete minor Y.

I've labelled today's action as the beginning of wace [c] - the same invalidation points stated for the other options which sport this count apply here.

For completeness, here's the chart I was posting today showing yesterday's high and the action which followed it today:

SPX 1 min - complete double zig zag:

I've labelled it with the (1)-(2)-1-2 count mentioned above. I had labelled today's low as iii of 1, but with the rally from there reaching 61.8% of the decline, it looks best as a complete wave 1 followed by wave 2. As noted, it could just be a (1)-(2), if we had a truncated 5th wave to end the zig zag.

One thing that needs to be borne in mind is that if we are in what would be a 3rd (or [c]) wave decline of some degree on all the options except Option 3, we need to see some really decisive downward action. Until then, I think that there remains a risk that the corrective rally from 1 July is not over and has a little more to go or that we are in the larger correction anticipated by the labelling on the chart of Option 3, or that we are now in a much larger rally which will eventually take us to new highs (see the comments in relation to Option 4).

Today's downward action was a start, but it needs to get alot more decisive than that before we can really start to believe that a 3rd wave down has started. So, I think caution is still required on the short side for the time being.

19:55 BST - SPX Update

Yesterday's high held, so I'm labelling today's high as a wave (2) (on the bearish count - see Options 1,2,4 and 5) or wave [B] (on the bullish count - see Option 3).

Here it is on the bearish count:

I have the drop from today's high as part of wave 1 of (3) (it would be part of wave [C] on Option 3).

Its not clear whether the low marked iii is the low of that wave or if we still need another low to complete it. If its wave iii and we're now in wave iv, the invalidation point is 1096.59.1. If its the 4th wave within iii, the invalidation point is 1095.01.

Today's high is the invalidation point for this bearish count.

15:40 BST - SPX Update

It looks Ok as a 5 down and an expanded flat up so far - 

SPX 1 min chart:

Taking out today's high would naturally invalidate this, but its one of those nice, risk reward situations.

14:41 BST - SPX Update

The gap area highlighted in the chart below would seem to be a good initial target if we did complete a corrective rallly from 1 July at yesterday's high:

SPX 1 min chart - complete double zig zag:

For the moment, we remain in the territory of a possible expanded flat wave (4), with yesterday's high being a double zig zag for wave B, so we need to be alert to this possibility.

14:10 BST - ES Update

Last night's update showed a potentially complete correction (double/single zig zag) into yesterdays high.

Here's the count for a complete corrective wave on ES at the overnight highs:

ES 5 min chart:

If the move off the 1 July lows was corrective, we need to see really decisive impulse moves down now, assuming the correction is complete. Otherwise, there remains the risk of the impulse count from the July low which I show in the chart of Option 3, which could just keep taking us higher. On SPX, the invalidation point for that impulse as labelled is 1028.74 - its a long way away, so as ever, caution is required on the short side.

11:47 BST - SPX Update: On the Bearish Counts - Leading diagonal or ones and twos?

So, on the bearish case, that 1219.80 represented a primary wave [2] top (see my Option 2 on the Long Term Counts page), the question arises whether we've completed minor wave 1 of intermediate (1) of primary [3], in the form of a leading diagonal - see my Option 3 on the 60 Min Counts page - or whether we're still in the process of a series of ones and twos down from 1219.80 - see Options 1 and 2 on the 60 Min Counts Page.

Here are some things I've been considering to try to answer this question.

For SPX, the way I have been counting it for the past several weeks has it complete for  minor wave 1 on 1 July.  Both the Dow and Nasdaq Comp can also be counted as complete diagonals on that date, althought their 3rd waves would have to on 8 June (because they went lower than their 25 May lows on that date) , whereas I have the 3rd wave on SPX on 25 May. 

The Transports and the Russell can't be a valid diagonal at 1 July since what would have to be their 3rd waves are longer than their 1st waves. However, they would be valid diagonals ending on 8 June, but that's inconsistent with SPX, Dow and Nasdaq Comp.

The Nasdaq 100 just doesn't count as a diagonal at all - when SPX made its 3rd wave, NDX failed to make a new low, so couldn't have had a 3rd wave of a diagonal at that time. It also failed to make a lower low than what would have been its 1st wave when Dow, and Nasdaq Comp made theirs, on 8 June, so that couldn't have been its 3rd wave either.

Here's a chart of SPX on which I've noted some of the differences between the indices:

SPX 60 min chart:

So, there are diagonals there to be seen, except on NDX, but they have different 3rd wave lows, or different 5th wave lows.

However, if I look at the ones and twos counts (see Options 1 and 2 on the 60 Min Counts page) this can be applied to all of the indices mentioned above, including NDX, even though the Transports and the Russell made  their most recent lows on 8 July, while the other indices made theirs on 1 July.

While there's no rule that all of these indices have to be in precise alignment with each other, and its perfectly possible that the Transports and the Russell led by making leading diagonal lows on 8 June, while SPX, Dow and Nasdaq Comp only completed theirs on 1 July, if we did make an important primary wave [2] top in April, it would make sense that they should be more aligned than applying the leading diagonal counts would allow. It would also make sense that in a primary degree 3rd wave, we would be stepping down in ones and twos, prior to a huge 3rd of a 3rd (of a 3rd on Option 1) to come. What could be more suitably bearish for a primary degree 3rd wave?

So, for the moment, I think I just slightly favour the ones and twos counts shown in Options 1 and 2 on the 60 Min Counts page

Clearly, I need to be alert to the depth of this latest retracement from the 1 July low, but we've seen deep 2nd wave retracements before - see minor 2 on 11 December 2007 (70.7% retrace - .707 is the square root of .50), or minute [ii] of minor 3 on 26 December 2007 (70.7% retrace).  We're at that level on SPX now on the counts shown in Options 1 and 2. 

So, I don't think we can rule out the ones and twos counts solely on the basis that we've retraced more than a certain level, unless, of course, we move above the start of the 1st wave that is being retraced. In this case, that means 1131.23 (although I explained on the 60 Min Counts Page why taking out that level won't necessarily invalidate a ones and twos count). I'll be watching the pullback from the current rally closely since it may provide an early indication as to whether we did complete a diagonal on 1 July, or whether we are now in that 3rd of a 3rd wave down.

And of course, deep 2nd wave retracements give a good risk reward when looking to enter for a potential 3rd wave move - in that sense, the deeper the better. But it obviously makes it more difficult psychologically to make the trade. But isn't that the purpose of a 2nd wave?