Thursday, 22 July 2010

22:41 BST - SPX Update

As I mentioned in the update after the close, in respect of the count on the chart of Option 3, I'm a little dubious that wave (v) of [a] is extending in the manner that the labelling suggests. So, looking at the alternatives, maybe we are forming an ending diagonal for wave (v) as shown by the dotted red line on this chart:

SPX 1 min chart - impulse up from 1 July:

The ending diagonal possibility would be eliminated if we drop below the blue dotted line since it would make the lines parallel rather than converging. If it does play out, a target area might be 1109 where this wave (v) would be about 2.618 x wave (i).

Or perhaps we completed wave [a] at 1099.46 and we are now in wave [c], in which case, a subdividing wave wouldn't look out of place. Here's a 10 min chart:

On this count, we still have to stay above 1065.25 for it to remain valid. Taking out 1056.88 would suggest that the count may be wrong, but it may just mean that wave [b] is continuing.

On this count, wave [c] would be equal in size to wave [a] at about 1146.

21:40 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've labelled completed double/single zig zags ending with a truncation at 1099.08, followed by 5 waves down to yesterday's low at 1056.88, with today's high being the end of a corrective rally in the form of a  zig zag (see the chart posted at 20:33 BST for the zig zag count). 

If correct, then for Options 1 and 2 we would now be about to start a 3rd of a 3rd wave down at various degrees - both very bearish. For Option 4, we would be about to start wave (iii) of [c] of minor Y down - temporarily bearish. For Option 5, we would be about to start (iii) of [c] of minor Y down - again, temporarily bearish.   

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've labelled the high at 1099.46 as wave (iii) followed by  wave (iv) down to yesterday's low at 1056.88. The rally from there is labelled as i-ii-[1] of (v) of [a] up (see the second chart in my post at 16:55 BST).

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

The question whether the rally from 1 July has completed a corrective move or whether its only all (or maybe, part) of a larger correction up remains to be answered.

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 that we are now in a wave iii of (iii) decline.

I've labelled a complete 5 wave decline from 1099.08 to 1056.88 to complete wave [1] of iii of (iii) down, followed by a  zig zag to today's high at 1097.50 for wave [2] of iii.

The 1099.08 high remains the invalidation point for the completion of wave ii on the  zig zag as labelled. Basically, for this count as labelled, we have to drop now and do so in a manner consistent with a 3rd of a 3rd at various degrees. The first level to watch is 1065.25, the (B) wave low, as you can see from the chart posted at 20:33 BST. Breaking that low would be a good indication that wave [3] of iii has started.

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.

This is the same labelling as on the chart of Option 1 for the rally from 1 July and subsequent decline (although the wave degress are different), so the invalidation point is  the same and the same comments made in respect of that count also apply here.

Option 3 - Ending diagonal complete at 1010.91

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) (at 1099.46) of what I'm assuming at the moment will be a 5 wave move for wave [a] of minor 2.  This would mean the pullback to 1056.88 was wave (iv) of [a].

We would now be in wave (v) which, on the basis of the action, seems to be sub dividing. This, to me, makes this count a little unlikely since it would mean a pretty large wave (v) compared to wave (i). However, unless it takes out 1065.25, its technically valid.

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 charts of the other Options 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 started wave (iii) of [c] down  from  the 1099.08 high. The 5 waves down to 1056.88 would be wave i of (iii)  of [c] and the rally to today's high would be wave ii. We ought now to be in wave iii of (iii) of [c].

The invalidation point is the same as for Options 1 and 2, though a continiung wave (ii) correction wouldn't be ruled out unless we take out 1131.23.

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 a single zig zag on this chart for wave [b], but its end point is the same as for Options 1, 2 and 4, namely, the high at 1099.08, so that would be the beginning of wave [c]. 

I'm counting the 5 waves down from that high to 1056.88 as wave (i)  and today's high as wave (ii) of [c]. The same invalidation point stated for  options 1, 2 and 4  applies here, but again, it wouldn't rule out a continuing wave [b] correction unless 1131.23 is taken out.

On Options 1, 2, 4 and 5, even if 1099.08 is taken out, there remain counts for a corrective move up from 1010.91 (see the first and third charts in my update at 16:55) which aren't invalidated unless we take out 1131.23. So, the bearish Options remain very much alive, even if 1099.08 is taken out.

As mentioned in  my post at 20:33 BST, the divergence between the main indices is potentially bearish. They didn't work that diverence off today, but could do so within the next couple of sessions, in which case, it will have meant nothing. However, its something to take note of since as long as it persists, it has possible bearish implications.

20:33 BST - SPX Update

This complete ending diagonal count has no more room left - it has to drop now or its going to be invalidated.

If the ending diagonal in wave [C] is correct, then taking out 1091.01 would suggest wave ii is done, albeit with a very deep retracement.

SPX - complete zig zag from 1056.88:

Although the depth of the retracement of the decline from 14 July seems to render this count unlikely, so far, the Dow, the Nasdaq Composite, the Russell and BKX are a reasonable way below the high of that date (BKX is nowhere near it in fact), so this count presently works well on those indices.  Only the Transports and the Nasdaq 100 have taken out the 14 July high. This divergence between the indices may prove to be bearish, though they may yet negate the divergnce, of course.

16:55 BST - SPX Update

On the counts I'm following, the 1065.25 level seems to be of potential importance. Here are the charts to show why:

SPX - double zig zag from 1 July:

Taking out 1065.25 on this count may just mean that wave [B] is continuing, but it may start to make the count look unlikely.

SPX -  impulse from 1 July:

Taking out 1065.25 on this count would mean we are not in wave [1] of iii. Provided we don't take out 1056.88, it could be that wave ii is continuing, but I don't think it would look good since today's rally would have to be a [B] wave within ii but it looks like 5 waves, not 3. So, taking out that level may mean this count is unlikely to be in play, even though its only invalidated below 1056.88

SPX - wave [C] of second zig zag:

Taking out 1065.25 on this count would suggest the second zig zag is over, unless wave [B] is continuing - that might seem unlikely for the reasons referred to above in respect of the first chart. However, it wouldn't rule out a continuing wave x, so we'd still have to be on the look out for another zig zag until the 1 July low is taken out.

SPX -  complete zig zag from 1056.88:

Taking out 1065.25 on this count is likely to signify the end of the move up from 1056.88, even though it wouldn't be conclusive until we take out 1056.88.

15:41 BST - SPX Update

Here's another count to consider - that we're in the final [C] wave of a double zig zag up from 1 July. This is more bullish than the count I posted earlier and would probably involve moving above 1099.08. However, its less bullish than the impulse count shown on the chart of Option 3 or the other continuing double zig zag count that I posted at the end of Tuesday night's update:

SPX 1 min chart - in wave [C] of a second zig zag from 1 July:


15:16 BST - SPX Update

The bullish options have certainly re-gained the upper hand today - see the chart of Option 3 in last night's update - but this bearish one still remains valid:

SPX 1 min - bearish count:

Its invalidated above 1099.08, so not much room left for it. Still, its worth noting.

12:02 BST - Options Equity Put/Call Ratio Update

On Friday 16 July the 5 day moving average of the CPCE had ticked up in an area of support, giving an early suggestion that we may be reaching a top of some kind in the market (you can see a longer term chart here). I said then that we needed to see the 10 day ma also tick up and the 5ma cross above it.

Well, we have those conditions in place now, so on past performance, there's a reasonable chance that we have seen, or are fairly close to, a top.

Here's the updated chart:

CPCE Daily:

A couple of points to note:

1) Just because the conditions mentioned have been met, does not mean that the market won't go higher - this signal doesn't necessarily occur at the precise price top;

2) note the period highlighted by the green rectangle where the moving averages got stuck under the blue line, even though the 5ma crossed above the 10ma a few times. You can see on the price chart in the window below that the market continued to move up during this period, quite signifcantly.

So, there's a reasonable prospect that a market high is in or near, based on the tick up in the moving averages of the CPCE and the cross of the 5ma above the 10ma, all at an area of prior support. However, watch the behaviour of these moving averages - if they begin to struggle to get above the blue line, it could be a warning that the markets will continue higher before a top is reached.