Tuesday, 3 August 2010

22:37 BST - SPX Update

Here's the close up of today's action that I've updated from my earlier post:

SPX 1 min - count from 1127.30:

The main count shows the (1)-(2)-1-2 down from 1127.30 on the assumption that we had a complete zig zag (single, double or triple) at that high.

The black dotted lines show the potential triangle that is forming if the single or double zig zag isn't complete (I explained in tonight's update that for the triple zig zag, a continuing 4th wave in the last  leg of the third zig zag probably wouldn't look right). Obviously, if its a triangle, the drop from 1127.30 to today's low, which would be wave a, must be counted as a zig zag, probably a double zig zag.

If the triangle is playing out, we've probably only had waves a, b and c, so there would be a bit more sideway's action to come tomorrow. The other possibilities for a continuing 4th wave correction from the 1127.30 high and the levels to watch that would invalidate them are explained on the chart and in tonight's update, in case the triangle is invalidated by a drop below today's low at 1116.76.

21:16 BST - SPX Update

The Options shown in the 10 min charts below are the different ways to count the move down from 1219.80. There are 5 that I'm following and you can see the larger context of each on the 60 min counts page.

Options 1, 2, 4 and 5 imply that the rally from the 1 July low is correcting the decline from 1131.23 only, so will  be invalidated above 1131.23. On the count on the chart of Option 3 that rally is correcting the whole decline from 1219.80, not just the decline from 1131.23.

Its possible to label  a complete single, double or triple zig zag from the 1 July low at 1010.91 to the high at 1127.30.

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

However, its also possible to label the single and double zig zags as incomplete and requiring at least another rally in a 5th wave before they are done, so there remains a possibility of further upside before a corrective move up from 1 July can count as complete.

Here's how things stand after today: 

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

10 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 would be in wave iii of (iii) once the correction of the decline from 1131.23 is complete.

I've shown  the double zig zag count on this chart. It remains valid on this Option provided we stay below 1131.23. If we exceed that level, there is still a bearish count in play (see what I have said under Option 1 on the 60 min counts page), but I don't think it would look very attractive and I think I would abandon this count if that occurs since the alternate shown under Option 2 on the 60  min counts page would look much better if 1131.23 is taken out.

Although I've shown on this chart a complete double zig zag from the 1 July low, its possible that today's action was all or part of a wave 4 triangle and that we have one more high to come to complete the double zig zag - see this count  on the chart of option 5 below. 

If we take out today's low without making a new high first, the triangle 4th wave would be invalidated. It may be possible that we are still in the 4th wave of (C), provided we stay above 1104.32, so even if we take out today's low, we couldn't rule out some further upside to come unless 1104.32 is taken out.

That would be the initial level to watch, but more important would be the low at 1088.01 and then the low at 1056.88.  Until those levels are taken out, the bullish counts shown under Options 3 and the bullish alternate under option 4, still have the ability to take the market higher.

Option 2 - Wave [ii] topped at 1131.23

10 min chart:

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

On this chart I've shown the possible triple zig zag count. To remain valid, we need this to stay under 1131.23. However, even if we take out that level therefore voiding the [i]-[ii]-(i)-(ii), we could still be counted as being in a [i]-[ii] down from 1219.80. As explained on the 60 min counts page, that would not look at all bad under this Option.

I don't like the possibility of a continuing 4th wave on this count because it would look out of proportion to the 2nd wave of wave [C], so I would say that the triple zig zag should be complete at the 1127.30 high and if we take that out then its more likely that the single or double zig zag is actually playing out. 

As explained under Option 1 above, if we have completed a triple (or single or double) zig zag, we need to take out the 1088.01 low to start with.  From there, we need to follow through with impulsive declines that have the character of a 3rd of a 3rd wave and take out 1056.88. Until then, the trend remains up and care is needed on the short side.

Option 3 - Ending diagonal complete at 1010.91

10 min chart:

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

It places us now in minute [c] of minor wave 2 up. I've labelled minor 2 as having completed today, but its feasible that:

1) we've only seen wave (i) of [c] of minor 2 and not the whole of wave [c]. Taking out the wave [b] low at 1088.01 will eliminate that as a possibility; or

2) we're in a wave (iv) triangle - taking out today's low would eliminate this; or

3) 1127.30 was only wave (iii) of [c] and wave (iv) was an expanded flat ending at today's low. If we take out today's low without a new high first, this is ruled out; or

4) wave (iv) could be forming a deeper correction and we've only seen the  a and b waves today. This is valid provided wave (iv) doesn't end below 1104.32.

These possibilities apply whether we are labelling a single or a double zig zag from the July low.

If we've completed minor 2, we should see an implusive decline from here that quickly takes out the wave [b] low at 1088.01. Anything less leaves open the possibility that there is more upside to come.

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

10 min chart:

For this Option, 5 waves down from 1131.23 would be wave (i) of [c] of minor Y and the double/triple  zig zag up from 1010.91 would be wave (ii) of [c]. With either of those complete, we would now be starting wave (iii) of [c] down.

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, the possible counts for the move up from there are shown on the 60 min chart of the bullish alternate count for Option 4 on the 60 min counts page which shows a [i]-[ii]-(i)-(ii)-i up from the July low. An alternative  [i]-[i]-(i)-(ii)-i count is shown on this chart:

SPX 1 min - Impulse from July low:

For the moment, I've assumed we completed a single/double/triple zig zag for wave (ii) of [c] at 1127.30. Please refer to the comments made under under Options 1 to 3  above.

If we take out 1131.23, then the bullish possibility mentioned above is likely to be playing out, assuming Option 4 is the correct count on the bigger picture.

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

10 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.

This is the same double zig zag shown for Option 1 but I've shown it as incomplete and requiring a further high. However, the comments made under Options 1 and 3 apply equally here.

If we do take out 1131.23, under this option there remains a bearish interpretation - it may just be completing a more complicated X wave before starting wave Y down. I've shown this as a possible alternate on the chart of this Option.

18:03 BST - SPX Update

If we completed a double or triple zig zag at yesterday's high, here's a possible count for the move from that high:

SPX 1 min - count from 1127.30:

Note, however the bullish possibilities that remain (see note on chart) with the levels that need to be taken out to exclude them. The single zig zag count referred to is the one shown earlier.

15:410 BST - SPX Update

For an immediately bearish count, this complete triple zig zag looks OK, with what looks like 5 waves down from yesterday's high. Obviously, its wrong if we take out that high (the same applies to the double zig zag count shown on the chart of Option 1 in last night's update):

SPX 1 min - triple zig zag:

The risk remains that there is still further upside to come as you can see from this chart:

SPX 1 min - single zig zag:

The 5 waves down from yesterday's high could just be the c wave of an expanded flat wave (iv). As I said in last night's update, we really want to see 1088.01 get taken out if the single zig zag is complete.

11:43 BST - SPX Update

Here's the 60 min chart I posted at the weekend, which I've updated following yesterday's action:

SPX 60 min:

The more bearish than bullish picture that seemed to be the case at the weekend was overcome with the bounce off the lower line of the blue trend channel. However, the market has simply gone back up to the median line of the pitchfork (orange lines) where it has previously failed on two occasions.

Although yesterday's move was bullish, I would be concerned here on the long side given that:

1) the RSI (14), though now above 50, has a bearish divergence against the new high in price and the prior two highs;

2) although the MACD histogram has made a higher peak than it did on the last high in the latter part of July, its still lower than the peak made against the price high marked w. Also, if you look closely, the last bar was lower than the prior bar, so its showing signs of peaking;

3) the MACD itself shows bearish divergence against the two prior price highs;

4) the stochastics may be topping - but its perfectly possible for it to remain at these levels and for price to continue up, so I don't think we can really read too much into this one;

5) the ADX line is even weaker than it was on the last rally into the latter part of July (and it was weaker into that rally than it was into the rally in the early part of July).

None of this means we will get an immediate sell-off, but there do appear to be some headwinds here to achieving much further upside. Perhaps these suggest that stops on long positions ought to be tightened around these levels, just in case.

If things are really bullish, we're going to see the market get above the median line of the fork and turn it into support for further upside and all those bearish divergences may well disappear. However, if it can't do that, the risk is that we drop right back down to the lower line of the blue channel and, quite possible, drop out of that channel altogether this time and head for the lower line of the fork.

If I was looking to enter a new long position here, given that the median line of the fork has provided resistance on two prior ocassions, a simple strategy might be to wait to see that median line get turned into support before taking a position. If I was looking to enter short, the stratgey might be to let price drop back below the median line and for any backtest of it to fail.

10:27 BST - Options Equity Put/Call Ratio

Here's an updated chart of the CPCE. The last time I posted it, the 5 ma appeared to be forming a double bottom, but it had not yet moved above the 10ma. As of yesterday, we now have the 5ma above the 10ma and that double bottom, so far, has held:

CPCE Daily:

This might be taken as an early signal of a top in the market either being in or very close to being in. Remember that the signal doesn't necessarily catch the exact top or bottom and if these moving averages continue to struggle to stay above, or, in the case of the 10ma, get above, that blue dotted line, the risk of further upside in the market remains (see my post on 22 July).

I've added the McClellan Oscillator in the bottom window. Its diverging against the new price highs at the moment. It may perhaps be setting up a failed backtest of the upward sloping red trend line that it broke in the decline in the market into the end of July.  Its something to keep an eye on. 

If it does fail and the bearish divergence continues, that may provide another indication that the market may have topped or be very close to a top. 

If we're in one of the more bullish counts, then we'd expect to see the divergnce in the McClellan Oscillator work itself off and for the red trendline to be broken back above decisively. We'd also expect to see the 5 ma drop back down below that blue dotted line and the 10ma remain below it.

8:31 BST - Dollar Update

The potential ending diagonal in the dollar that I mentioned last week and on the dollar page, was well and truly busted yesterday. Its now looking like wave [v] of C (assuming that's what it is) is a straight impulse wave as shown on this 60 min chart:

Dollar Index 60 min from wave (1) high at 88.708:

Looking at it close up from the wave [iv] of C high at 83.455, it looks like there may be a bit more downside to go. That 80.792 low may be wave iii of (v), or it may only be part of wave iii, though its also possible that 80.792 may mark the low. Any long entry here taken on the basis that we may have seen the low would probably need to be closed if we do drop below that level, but obvioulsy it depends on trading style.

Dollar Index 60 from wave [iv] high:

I would tend to wait for the type of action I've described previously, an impulsive move up that takes out a potentially important level. Here, if we ran up in 5 waves above the wave (iv) high at 81.977 and then pull back in three waves, that would certainly be a reasonable signal to try a long position. Or, for an earlier entry, a smaller clear 5 waves up followed by a 3 wave pullback would also be a reasonable entry.

Obviously, it should be borne in mind that the trend, for the time being, is firmly down, so any long positions taken need to have regard to that.