Friday, 20 August 2010

21:09 BST - SPX End of Day Update

I'm still for the moment concentrating on the move down from the high at 1129.24. I'm looking at a 5 wave decline from that high. 

On the bearish counts, shown on the charts of Options 1 - 5, this would be  a 1st wave down in a larger impulse (either a 3rd wave or a [c] wave, depending on  which Option you're looking at - you can see them all to get some context on the charts below on the 60 min counts page.) ending at either 1076.69 or 1069.49 ( see this post for an explanation of this). On the bearish counts, I've then labelled a 2nd wave retracement either complete at 1099.77, or with a [C] wave back up to that area (and possibly higher) to come.

On the bullish counts, the move down from 1129.24 to 1063.91  would be a wave (ii), B or [b] correction (depending on the Option) before what could be a significant rally higher. 

As you'll see from the charts below, both bullish and bearish possibilities remain very much alive. Here's the bearish count for the move since 1129.24:

SPX 1 min from the high at 1129.24:

This chart uses the labels and degrees relating to Option 2, but relates to the bearish counts for all the Options referred to on the 60 min counts page.

So, from the 1129.24 high, I'm counting a i down and ii up, followed by wave [1] of iii down which can be counted as complete at the low of 1063.91. The alternate labels show the moderately bullish count that still has us in wave ii, which would now be forming an expanded or running flat, with the [C] wave up still to come. 

For the immediately bearish case, we're looking for a 3 wave rally that ends somewhere in the region of a 50% retracement. Assuming wave [1] of iii bottomed at 1063.91, the 50% retracement level would be at about 1082. Of course, it could go higher. The 61.8% retracement level is at about 1086. Much higher than that at this stage of the bearish count and we'd have to watch carefully for signs that something more bullish is happening. Technically however, elliott wave theory allows a 2nd wave to retrace the whole of the 1st, so this count wouldn't be invalidated unless we take out the 1099.77 high.

Here's the count close up:

SPX 1 min close up:

If this is the correct labelling, we have to stay below the start of wave [1] at 1099.77

If that high is taken out, the alternate labelling would still be in play, which would make the rally from the low at 1063.91 wave [C] of ii. We would then look for an impulsive decline to take out the 1063.91 low to gain some confidence that the alternate bearish count on the above chart was playing out and not something more bullish.

And these are the bullish counts (two are bullish alternates under Option 4 on the 60 min counts page while one relates to all of the bearish counts on the 60 min counts page):

SPX 60 min - first bullish alternate under option 4 - impulse up from 1010.91:

As shown on the chart, this count remains in play as long as we stay above 1056.88 on this alternate. That's the low of wave [ii] of the impulse up from 1010.91. If we take out that level, we could make a case for wave [ii] still being in progress as an expanded flat and that would remain a valid count as long as the low at 1010.91 holds.

SPX 60 min - second bullish alternate under Option 4 - leading diagonal up from 1010.91:

I've re-labelled this count following today's move below the 1069.49 low. It too remains valid unless we take out the 1010.91 low.

SPX 60 min - Moderately bullish count - zig zag still in progress from 1010.91:

If the labelling on this chart is correct, we shouldn't now move below 1063.91 without a new high above 1129.24.  If that low gets taken out, it may mean that wave [b] is on-going, with some re-labelling, since this count is really only invalidated below 1010.91.

So, for the bearish count, if we're in a wave [2] retracement up from 1063.91, we're looking for a three wave move up into the 1082-1086 area. A lesser retracement would suit the bearishness of the count, but shouldn't be expected. If we take out the 1099.77 high, focus would switch to the alternate count shown  for the bear case and we would look  for a 5 wave rally from 1063.91 to be followed by impulsive declines that take out that low soon after that.

If we take out 1056.88 to the downside before we make new highs, the first bullish alternate under Option 4 will be invalidated. on the labelling shown. However, it could just be that we are still in wave [ii] of the impulse up from the 1010.91 low. That and the second bullish alternate under Option 4 as well as the bullish alternate applicable within the context of the overall bearish Options will remain in play until we take out 1010.91.

Have a great weekend!

19:50 BST - SPX Update: 1 min close up

Here's how I'm provisionally counting the move off the 1063.93 low today as far as the bear count goes:

SPX 1 min close up:

17:26 BST - SPX Update: 1 min - Possible wave [1] low and levels to watch to comfirm

Here's an explanation as to why we may now have a low and a couple of levels to watch which might confirm:

SPX 1 min:

16:38 BST - SPX Update: 1 min chart: possible wave 4 triangle within (5) of [1] down suggesting a low soon?

With the sideways action we've seen since the initial decline, this possible count suggests itself (whether wave (1) of [1] is where I have it or at the 1085.76 low as suggested in my earlier post):

SPX 1 min:

15:59 BST - SPX Update: 5 min pitchforks

If wave (5) of [1] of iii is going to extend (I suggested this possibility in my ealrier post), this blue fork on the 5 min chart may well tell us. If its broken to the upside and we don't reverse quickly back down into it, chances are we saw the wave [1] low at 1066.48. If we're extending down in wave (5), we're likely to stay in the fork and at least head towards its median line again:

SPX 5 min pitchforks:

15:49 BST - SPX Update: 15 min pitchforks

This pink fork has been doing a good job, holding back the bounce yesterday at its median line and now providing support to the market at what may be the completion of wave [1] of iii down:

SPX 15 min pitchforks:

If we have completed wave [1] of iii, we could see a move back up towards the upper line of this fork and the upper line of the larger red fork - this is certainly possible bearing in mind the retracement levels shown on the chart I posted earlier.

Obviously, that would also take price back into that upward green fork, which is potentially bullish. If that happens, what we would want to see for the bear case would be a failure to get to the median line of that fork, preferably followed by a collapse back down out of it and back to the lower part of the pink fork - that would be bearish. Its what happened with the black fork shown in this post - and look what happened to the market when that fork failed.

15:24 BST - SPX Update: 1 min chart - Possibly more downside for wave (5) of [1]?

Here's something to consider - if I use the original labelling I had with wave (1) at the low of 1085.76, it could mean more to come in wave (5):

SPX 1 min:

At the moment, wave (5) is just about .886 x wave (1) if I put wave (1) at the 1085.76 low.  If it were to equal wave (1) it would take us to 1065. If it were to extend to 1.236 x wave (1), we'd get to about 1061 and a 1.382 extension of wave (1) would be about 1059.

Of course we can't know if this should be the correct count but if we take out today's low without a retracement sufficient to call wave [2], its certainly something that could be playing out.

15:05 BST SPX Update: 1 min chart - Retracement levels in case we've hit a low for wave [1]

As you can see from my previous chart, I think there are enough squiggles between waves (4) and (5) on my labelling to mark a wave [1] low. Taking out today's low will invalidate that labelling, but just in case, here are the retracement levels to watch:

SPX 1 min from 1129.24 high:

14:56 BST - SPX Update: 1 min close up

Look out for a possible wave [1] low:

SPX 1 min close up:

Taking out today's low woud invalidate this labelling of course!

12:56 BST - SPX Update: Are we still in a zig zag from 1010.91 with a big C wave rally still to come?

Here is something to watch out for because  even for the bearish Options, it would mean some potentially significant upside to come first, likely above the highs of 1129.24 and 1131.23. I've put it on the chart of Option 3 because I think it looks best on that chart, but it could also apply to all of the bearish Options (see the 60 min counts page for those Options):

SPX 60 min - still in a single zig zag from 1010.91:

As you can see, it takes the leading diagonal count for the move up from 1010.91 which I've been showing on the second bullish alternate count under Option 4 and labels it as wave [a] of a zig zag up from 1010.91. The decline from there would be wave [b], leaving a 5 wave rally in wave [c] yet to come.

With this count looking not unreasonable, once we've had a 5-3-5 down from 1129.24, we'll have to be alert to the possibility that the next move up could be wave [c] of this zig zag, taking us to new highs for this move up from 1010.91.

On the labelling I've shown, we only need one more low, preferably below 1070.66, to complete a 5-3-5 move. So, we'll then need to watch the retracement from there carefully for any clues that this count may be playing out.

The problem we have is that even on the bearish counts, we are expecting a new low below 1070.66 and then a rally in a 2nd wave. If that's correct, the high at 1099.77 must hold (that's the start of the 1st wave that we would be retracing on those bearish counts). After seeing 3 waves up from any new low, we'd want to see an immediate impulse wave back down.

However, as the third chart in this post from yesterday shows, even on the bearish counts, we could be in a flat for a 2nd wave of one higher degree so would be expecting a c wave up, probably to above 1099.77 and 1100.14. And, that wave will have to be a 5 wave impulse. So, it won't be easy to tell whether this or the potentially more bullish count in the 60 min chart above is playing out - the more bullish count could see the [c] wave take us to the 78.6% retracement level for the decline from 1219.80, which is at about 1175.

Obviously, there are other tools we can use apart from elliott wave analysis that may help. 

I've drawn in a down channel which would be the base channel on the bearish count. If we are in the immediately bearish count, we should accelerate down out of this channel to form a steeper one for wave (iii) on the bearish count. So, a significant break down out of this channel without an immediate recovery should be bearish.

If we stay within this channel for this decline, as a guide, its more likely that the move down within it is corrective. A break above the channel might be a warning that the more bullish count above is playing out. However, if the flat referred to above is in play, we could break above the channel in its c wave, only to fall back within it. So, we'd look for a significant break above and a failure to drop back within it pretty much immediately as an indication that the more bullish count could be playing out.

I also make alot of use of pitchforks to try to identify trends and turning points for trends. You can see my last post showing the pitchforks I'm watching and what I'd want to see for the bearish case here.

So, as ever, there are no certainties in trading - we just have to be prepared for all eventualities.

11:51 BST - Dollar Update: 25 min chart

The dollar held the 81.192 low in what looks like a wave [2] pullback (it was deep - about 88.6%), which is what I was expecting to see after the apparent 5 waves up from 81.192 for wave [1]. You can see the last post here.

Here's the updated chart:

Dollar 25 min:

You can see how wave [2] came right back down to the lower line of the pale green pitchfork and close to the upper line of the red one (both from yesterday's chart). Coinciding as they did with the 88.6% retracement level, it was a good place to get long the dollar - I've said before, that retracement level is one of my favourites since it gives a low risk entry point for positions.

I've drawn in two more upward forks which reflect the acceleration we've seen in the move up today. If this is wave [3] up, the steeper one will ideally be the fork that has the greatest influence on price.

We're above the median lines of both of those new forks, which is bullish action in pitchfork land. What I'd like to see now is any retracement hold at or above the upper line of the pale green fork from yesterday and/or the median line of the new dark blue fork (the less steep one) and head towards the upper line of the new dark green fork which should also take it above the upper line of the dark blue fork.

In elliott wave terms, if my labelling is correct, we are in wave (3) of [3], so the next pullback in wave (4) must stay above the wave (1) of [3] high at 82.610. If it doesn't, the labelling is wrong. I'd then look to the wave (2) of [3] low at 82.416 - as long as that holds, we could be in a (1)-(2)-1-2 up within wave [3].  If it doesn't hold, then I think a re-assessment will be needed.

9:45 BST - Equity Options Put/Call Ratio and Percent of S&P 500 Stocks Above the 50ma

Here's an update of these two charts which I last posted on 12 August (you can read that post here):

CPCE Daily:

On 12 August, the moving averages of this ratio we stuck below the blue dotted line in a similar configuration to what we saw during the grind up in the market in August to October 2009 (see the green highlighted areas). The risk was that we would see the same thing happen again unless the moving averages started to get above the blue dotted line. A good sign for the bear case at that stage was a possible triple bottom in the 5ma and higher lows being formed in the 10ma.

Finally, as you can see from the chart above, we have seen the moving averages break above the dotted blue line and also above the mid-line of the red dotted upward channel. An upward channel in these moving averages is bearish for the market.

We're now headed towards the overbought zone, but you can see from the peaks in these moving averages during 2008, that they can get to the top end of the zone before the market bottoms. Obviously, that's not to say they will - market lows have occurred with these averages about where we are now. So, as ever, we need to be on alert for a possible market bottom. If you were looking at this chart alone for trading, it would take the form of a turn down in the 5ma and a flattening out in the 10ma which might be a warning that the 5ma is about to cross back below the 10ma, which is potentially bullish (but as with any signal, whipsaws occur).

Ideally, I would like to see the moving averages get to the top end of the red channel. If we're in 3rd waves down at multiple degrees as some of my counts suggest, this shouldn't be difficult to attain and we could well exceed the upper line of the channel.

The McClellan Oscillator in the bottom pane couldn't break the downtrend line on the recent rally in price. That rally enabled it to backtest the zero line from below and it was firmly rejected.

The only potential worry from this Oscillator is that while price moved below the 12 Aug low yesterday, the Oscillator did not - its still hgher than it was on 12 August. Having said that, the lows in price of 12 Aug and yesterday are not that far apart, so this possible bullish divergence may not be too great a concern. and may work itself off  if we push down further today. Also, other technical indicators don't show the same divergence at the moment. Just looking at two, the RSI is below its 12 August level and the MACD histogram bar for yesterday is lower then the bar formed on 12 August so these don't confirm the possible bullish sign showing in the McClellan Oscillator.

Still, this is something to keep an eye on, especially if this divergence starts to get confirmation from other technical indicators.

Percent of S&P 50 stocks above the 50ma:

As explained in the previous post, when this line crosses below its 13ma, its usually a good bearish signal. On this occassion, its worked pretty well again, with the cross occurring on 10 August, which was the day before the steep decline on 11 August.

With the rally into 17 August, we saw the line turn up, which was a potentially bullish sign - see the previous occassions when this happened above the buy zone, as marked on the chart. But you'll notice that in those cases, the low that gave the final bullish signal was a second low above the buy zone, not the first low.

So, we probably now have to be more on alert for a possible turn around in this line given that we did, yesterday, make a lower low than the low on 12 August. For the bear case, we don't want to see the line turn up from here. However, generally, while we're below the 13ma, the risk is weighted to the downside, so I wouldn't take a turn up in this line below the 13ma as a buy signal (without other indicators confirming) unless we actually cross back above the 13ma. Perhaps it would be a sign to tighten stops on shorts and/or to take a little bit of profit.