Tuesday, 31 August 2010

21:30 BST - SPX End of Day Update

The market continues to behave in a way that means both bullish and bearish counts remain feasible, with all of the levels I'm watching to invalidate one or other still intact.

I updated the bullish counts earlier (see here) so won't deal with them again in this update. If you want to see those counts and the following charts in context, please go to the 60 min counts page.

So, here is the position on the bearish counts:

Chart 1: SPX 1 min - from the 1129.24 high, i-ii-[1]-[2]-[3]-[4]:

The main labelling puts us in wave [5] of iii down from 1129.24. As shown in my earlier post, it may be that wave [5] and, therefore, wave iii, ended at the low of 1040.88 that we saw today, with a slight truncation. In that case, we'd now be in wave iv up. 

However, for the moment, I'm assuming that we are still in wave iii because I think it would make more sense if wave iii reaches something like a 1.382 extension of wave i rather than being more or less equal to it. Still, if we take out the high at 1065.21 without a 5 wave decline preferably below 1039.83, the truncated 5th within wave iii would certainly be an option to consider.

I've re-labelled today's action from earlier to show us still in wave (2) of [5]. Its possible that wave (2) topped at 1055.14 as shown earlier and we've had a 1-2-i-ii down since, but for the moment, with that late rally, I'll assume more upside unless we take out the 1044.02 low without taking out the 1053. 75 high first (you can see more detail of this on chart 2 below).

I think that the alternate count shown on this chart, that has us still in wave ii in the form of an expanded flat, is becoming less likely as time goes on, as mentioned in my earlier post, but it remains a valid possibility.

Here's a close up of the above chart showing the main count as well as as the possibility that wave iii has already bottomed:

Chart 2 - SPX 1 min from the 1081.58 high:

If we've had a wave iii low, there are two places where it may have occurred, as you can see from the chart. The only difference it makes is that if it was at today's low, we probably have a bit more time to use up for wave iv so could see more upside for longer. Whichever low might be right, the fact is that if we are now in wave iv, it has to stay below 1069.49, which is the wave i low, otherwise the possibility would be eliminated.

If we take out that level or the 1065.21 level, invalidating the counts shown above, then, for the bearish case, I'll be looking at the other bearish counts I'm following which imply more upside above 1065.21 and probably also above 1069.49:

Chart 3 - SPX 1 min: from 1129.24, i-ii-[1] or wave i down:

The main count on this chart shows a subdividing wave iii down and puts us currently in wave [2] of iii (I've moved the (W) and (X) labels since yesterday).  As I said in yesterday's update, wave [2] of iii may have completed at the 1065.21 high, but I think its best to assume more upside to a higher retracement level, say, 50% for this. This count is invalidated if we take out the wave ii high at 1100.14.

The alternate count shown has us only having completed wave i down, so puts us now in wave ii up. We'd be retracing the entire decline from 1129.24, so the upside on this count could be substantial.

With both these counts, there remains an issue as to whether the low of wave [1] or i occurred on 25 or 27 August. Again, it doesn't affect the invalidation points. It simply means that we may have more time to use up than we have so far in wave [2] or ii if the low was on 27 August.

If the wave [1] or i low was on 27 August, here's what we might be seeing:

Chart 4: SPX 1 min - from the 1100.14 high:

I've labelled the move up from the 27 August low as  an (A)-(B)-(C) correction, but it could be an (W)-(X)-(Y). If its the latter, we'd need a 3 wave rally for wave (Y) rather than the 5 waves that would be needed for a wave (C). 

So, on the main count shown in chart 1 above, if we take out the high at 1065.21 before a 5 wave move down, preferably to new lows below the wave [3] low, that will be invalidated.  I would then be looking to the levels  identified in previous end of day updates:

1) if we're in wave iv up, it can't end above the low at 1069.49 if it does, then that would rule out the possibility shown in chart 2 above that we were rallying in wave iv;

2) the next count to look at would then be the  i-ii-[1] which is the main count on chart 3 above That count remains valid unless we  take out the high at 1100.14;

3) if we take out that 1100.14 high, then we may be in the expanded flat for wave ii shown as an alternate on chart 1, or the count that has us having only completed wave i down from 1129.24 (the alternate shown on chart 3),  or one of the more bullish counts shown in the update posted earlier (see here).

4) if we take out 1129.14, that will eliminate those two remaining bearish counts for the move down from that high, but the first bullish count shown in in the update on the bullish counts is bearish once wave [c] of 2 completes. If that count is in play, we would need to see impulsive downside action once wave [c] and 2 end, otherwise, focus will have to switch to the bullish counts under Option 4.

19:09 BST - SPX Update: Bullish Counts Updated

Referring back to the bullish counts on Charts 1 to 3 in yesterday's end of day update, the first one just managed to survive today and the second two may have ended in slight truncations for their final [C] or (c) waves. Here's how they look at the moment:

Chart 1 - 60 min - single zig zag from 1010.91 still in progress:

And here's a close up of this count, picking up the above chart from the low at 1039.83 on 25 August:

SPX 1 min - from 1039.83 low: 

Even if we invalidate this count by taking out the 1039.70 low, the count shown in the charts below can be applied to this chart:

Chart 2: 60 min first bullish count under Option 4 - impulse up from 1010.91:

Chart 3: 60 min - second bullish count under Option 4 - leading diagonal up from 1010.91:

On these counts, the [C] or (c) wave would be the ending diagonal I labelled in my earlier post, giving a slight truncation, but it would be a valid count. If the diagonal was a leading diagonal and we go on to take out today's low and the 1039.70 low, that would be fine too, but we have to stay above 1010.91 in order not to invalidate the count.

17:11 BST - SPX Update: 1 min: bearish count - wave (2) of [5] high perhaps?

If we're in wave (2) of [5] (the 1st possibility listed in my last post), its retraced just about 61.8% of the decline from 1065.21 to today's low:

SPX 1 min from the 1081.58 high:

Its also at resistance (referring to the main labelling on the chart above) from the wave 3 of (1) low and the wave b of 5 high (not labelled). With the risk that what I've labelled as wave Y of (2) has more to go to the upside, you'd want to be out above today's high. Taking out 1049.22 would help this count, but today's high would still be a good place to get out if it moves back up there, given the more bullish possibilities that remain. Of course, for this count, 1065.21 is the invalidation point.

16:14 BST - SPX Update: 1 min: bearish counts

We had the makings of a nice impulse wave finally developing to the downside, but its no longer easy to count a simple impulse from the 1065.21 high to today's low.  I think its now looking like an expanding diagonal as shown on this chart:

SPX 1 min - from the 1081.58 high:

If I try to count an impulse down from 1065.21, the move  up from today's low would have to be a 4th wave within that impulse. However, it doesn't really look like a 4th wave. It looks more like a 2nd wave, which is why this expanding diagonal comes to mind. Here are some of the options on this overall bearish count:

1) if its a diagonal, then it could be a leading diagonal wave (1) (it would be wave (1) of [5] on the main count labelled on this chart). This is invalidated above 1065.21; or

2) it could be an ending diagonal representing all of wave [5] (truncating, therefore) and therefore also wave iii. We'd now be in a wave iv rally. This would be invalidated if we take out 1069.49;

3) if the 1039.70 low was the end of wave iii and 1065.21 was wave [A] of iv, today's low could be double zig zag for [B] of iv. We would now be going up in [C] of iv. If we take out the low at 1039.70 before taking out 1065.21, this count would be invalidated since I'm counting wave [A] of iv as 5 waves, so its forming a zig zag and wave [B] in a zig zag can't move below the start of wave [A]. Also, wave [C] of iv has to stay below 1069.49 or the count is invalidated.

If any of these three counts is playing out, there could be more upside, but it is limited by the invalidation points referred to above. If they are taken out, then attention has to switch to the other counts which imply varying degrees of more upside (see yesterday's end of day update).

Here's a chart showing this count from 1129.24 for a bit more context:

SPX 1 min - from the 1129.24 high:

This chart shows the other possibility that we're still in wave ii up, and now in wave [C] of ii which should take us above the 1100.14 high. I'm not sure I like this count since wave ii is looking abit long in the tooth now, but it remains valid.

For the moment, for these bearish counts listed above, I'm watching the 1065.21 high and the 1069.49 low.

14:07 BST - SPX Update: 60 min chart

On Saturday when I looked at the 60 min chart of SPX, I highlighted the behaviour in the technical indicators that  suggested that however bullish the price action appeared to be on Friday, the technicals did not seem to be painting the same picture.

I noted on the chart in that post the sort of things the bear case needed to see and all of them have pretty much occurred with yesterday's action.

You can see this in the updated 60 min chart:

SPX 60 min:

The notes on the chart are self-explantory and identify the further action we would need to see from these indicators to confirm the weakness in the market seen yesterday.

I've also noted on the chart a couple of concerns that may undermine the bear case, at least temporarily:

There is a little bit of a worry that we didn't see any negative divergences between the indicators and price when comparing the high of 26 August and the higher high on 27 August. That raises the risk of another high above 1065.21 being necessary in order to achieve such divergence before the bear case can continue. 

As I've said before, divergences aren't compulsory, but they are often seen at tops and bottoms and help to identify them as such.  A higher high would fit with the count shown in Chart 6 of yesterday's end of day update, as well as the bullish count on Chart 1 of course. So, if this is what we see, it may increase the odds that one of these counts is playing out. If we fail to take out the 1039.70 low (preferably early on in the session), that may be the first sign that more upside above 1065.21 may be on its way.

Even if we don't rally up to take out the high of 27 August before making a new low, the indicators again look like they are set up to diverge positively against any new low in price. As noted on the chart, this would be consistent with the main count on Chart 4 and the alternative shown on Chart 5 of yesterday's end of day update which call for a 5th wave down now, as well as the bullish counts on Charts 2 and 3. which require a [C] or (c) leg down to complete their corrections. 

So, on any new low below 1039.70, I'll be watching for positive divergence between price and the indicators since it  may be a warning of an imminent turn back up in price as happened on Friday (after Thursday's session, the same positive divergence potential had set up and a substantial rally followed - see this post).

So, the lack of follow through to Friday's bullishness was a plus sign for the bear case. However, the bullish counts calling for varying degrees of further upside remain intact, so, as I said in yesterday's end of day update,  it remains a matter of monitoring the levels that elliott wave logic tells us will rule out various counts as price action develops and seeing what we are left with (I identified the levels I'm watching on the counts I'm following in that update)