Monday, 13 September 2010

21:20 BST - SPX End of Day Update

The ending diagonals I was watching on Friday were invalidated with today's gap up, but a new one emerged, along with the possibility that we completed a double zig zag from 1039.70 at today's high or that we completed 5 waves up from that low at today's high. 

A diagonal from 1040.88 or a double zig zag up from 1039.70 would be wave [C] of ii on the [i]-[ii]-i-ii bearish count. Five waves up from 1039.70  would be all or part of wave [c] of a zig zag on the count that has us in minor 2 up. A diagonal or 5 waves up would represent the next impulse up in larger rallies on the more bullish counts under Option 4.

For the bigger picture on those bullish counts and the bearish counts please refer to the 60 min counts page.

The action since the last posts today showing the potential wave counts hasn't done anything yet to confirm which may be playing out, so I'll just show the charts with updated labels to take account of the action since the earlier posts:

Chart 1: SPX 1 min - ending diagonal from 1040.88 or double zig zag from 1039.70:

This shows the whole of the move up from 1040.88 as an ending diagonal in progress for wave [C] of ii or a complete double zig zag up from 1039.70 to complete wave ii.

For the ending diagonal, if we completed wave (3) today, wave (4) needs to stay above the dotted orange line (otherwise the lines will not be converging), assuming we didn't complete it today.

On the more bullish counts, this diagonal would be a leading diagonal for a wave (i) or [i] up.

If we completed wave ii at today's high with the double zig zag that I've labelled, we really need to see clear impulsive declines. As yet, we haven't seen that, so this possibility may be low odds at this stage. However, if it can stay below today's high in 3 waves (it looks like a double zig zag up from 1116.14 at the moment) and then start to decline impulsively, that would boost confidence in it.

Here's a close up showing the count from the 1101.53 low:

Chart 2: SPX 1 min - ending diagonal from 1040.88 or double zig zag from 1039.70 close up:

As you can see, the count could go either way at the moment. The move down from today's high looks better to me as a zig zag, but I can certainly squeeze 5 waves out of it for wave 1 down if did  complete wave ii today.

So far, the move up from 1116.14 looks like a double zig zag, but it could easily develop into an impulsive move. If that happens, it may be that we bottomed in wave (4) at 1116.14 and have started wave (5) up to complete the ending diagonal.

Chart 3: SPX 1 min - 5 waves up from 1039.70:

This labelling applies to the count that has us in minor 2 up from 1010.91 or the more bullish counts (under Option 4 - see the 60 min counts page).

It could be complete at today's high as you can see from the alternative labels, but price has done nothing yet to confirm it. So, for the moment, further upside to complete this 5 waves has to be assumed. If we were to take out 1110.53 before making a new high, that would suggest that we'd completed 5 waves up from 1039.70 today.

So, after today's action, here's what I'm watching:

1) for the [i]-[ii]-i-ii count, we need to stay below 1129.24. If we take that out, this count is invalidated. That means that if we are in the ending diagonal shown in chart 1 above, we need to have completed wave (3) at today's high and be in wave (4) now. Once complete we need to see a very short wave (5). Wave (4) must stay above the orange dotted line which runs through about 1105;

2) if we completed wave ii today, we need to see price action to confirm: we need to stay below today's high obviously, but we also need to see decisive and clear downside action consistent with a 3rd wave down. As yet, we haven't seen this. Taking out 1101.53 in an impulsive move might help to increase confidence in this possibility;

3) if we take out 1129.24, that will focus attention on the bullish counts. The first bullish count (which has us in minor 2 up) shown in the update posted on Thursday  is bearish once wave [c] of 2 completes. As you can see from the charts, we could have completed it today or be on the verge of doing so, or the move up from 1039.70 could just be part of the [c] wave of 2. If we take out 1039.70 on the next move down, that would confirm the completion of wave 2 as a zig zag. It would also eliminate the two more bullish counts (although they remain potentially in play in some other form until 1010.91 is taken out).

18:38 BST - SPX update: Daily time and price chart and 60 min divergences

Well, we're certainly getting a reaction at the point where the time and price chart suggested a potential turn might occur. Here's the daily:

SPX daily time and price chart:

Obviously, we'll have to wait for the close of the daily bar to see whether or not it holds for today. All we can say at the moment is that it looks good for a reversal of some sort as we've hit a time and price target and the upper line of the channel on the time and price grid that price has moved within since the August lows (its obviously not a traditional technical analysis channel, but you can see that these grid channels have, in the past, been influential on price movement within the grid, both up and down - see the red, purple and black channels made up from the grid lines).

It may be of note that the level we've reached, 1123.87, is also within the range of a gann price level measured off the 1010.91 low. That level is about 1125. So, a confluence of these square root based price levels.

Here's the 60 min chart to show the divergences that have continued from when I posted the 60 min time and price chart showing them on Thursday:

SPX 60 min:

You'll see from the notes on the chart that despite the divergences, we need to see more in order to have more confidence in the bear case. 

Ultimately, price action must confirm a bearish interpretation of the wave count and that too hasn't yet done quite enough to confirm a bearish view. Its made a good start, but at the moment, at first glance, the decline from today's high looks like a (1)-(2)-1-2-3-4 (ignore the degrees, its just for illustration), so not quite 5 clear waves down.

Even if we see 5 waves down, it could still be part of a correction before a further push up (see the counts shown in the other charts posted today). So, with 5 waves down, we really also need to take out some meaningful price levels. 

For example, taking out 1110.27 would provide good reason to conclude that we're not seeing 5 waves up from 1101.53 (see the close up of the zig zag count posted earlier). That would be fine since I can label wave iv as a small triangle ending at the 1108.56 low, followed by a large ending diagonal up from there.

Taking out 1101.53 would suggest that the ending diagonal shown in the updates on the [i]-[ii]-i-ii count posted earlier is invalid, leaving the complete [W]-[X]-[Y] wave ii complete at today's high.

So, while the daily time and price chart may suggest a turn is likely in this area, we haven't yet seen price confirm a turn down or that any such turn down means that a significant top is in. More clearly impulsive downward movement and the breaking of significant price levels as described above would provide more confidence in a bearish view.

16:32 BST - SPX Update on the single zig zag count for minor 2

For the single zig zag count, here's a closer look at the 5 waves up from the August lows that would be all or part of wave [c] of minor 2:

SPX 1 min - close up of the single zig zag from the August lows:

As I said in my earlier post, if we take out 1129.24, this count will become the best count for the bear case, especially as it may be that any high above 1129.24 could be the whole of wave [c] of minor 2, which would likely be the end of minor 2 (in terms of time, wave 2 would be just more than 1 x wave 1).

16:12 BST - SPX 1 min: close up on the bearish count

Following on from my last post, here's an even closer look, in relation to the [i]-[ii]-i-ii count,  at wave (3) of the ending diagonal or wave [Y]:

SPX 1 min - from 10 September:

If its the end of wave ii then we're going to have to see a swift drop. Anything else will mean the risk of further upside in the ending diagonal or something more bullish remains.

15:59 BST - SPX Update on the bearish case

There's not much room left on the bearish [i]-[ii]-i-ii count as you can see from this 10 min chart which shows two ways to count the move up from 1039.70:

SPX 10 min - [i]-[ii]-i-ii down from 1219.80:

The re-jigged ending diagonal count still has another up and down move to come - obviously, the up part of that would have to be very limited since it has to stay below 1129.24.

The [W]-[X]-[Y] for wave ii can be counted as complete now (or pretty much so), but unless we see some strong downside action, the likelihood of a continued push up is high.

Here's a closer look at this count:

SPX 1 min - [i]-[ii]-i-ii zooming in from August low:

If we take out 1129.24, the best count for the bear case is the single zig zag from 1010.91 for minor 2 as shown on this chart:

SPX 60 min - single zig zag from 1010.91:

If we do take out 1129.24, I'd be very tempted to count that as the whole of wave [c] of minor 2, but we'd really have to wait and see the manner of the next decline.

11:44 BST - Dollar Update

Following on from my last post on the dollar (which you can read here), assuming we have seen wave [1]  of i of (iii) up from the low at 81.876,  the risk of further downside in wave [2] played out. We've now retraced just over 78.6% of the wave [1] rally. Its possible to count a complete correction at today's low. Here's how I can label it:

Dollar 60 min:

Its interesting that we bounced off the lower line of the correction channel for wave (ii). On a smaller time frame, its possible to count 5 waves within C of (Y) at the low of 82.055, but its also possible to count it as being now only in the 4th wave, with one more low to come. If there is another low to come, then it obviously has to stay above the low at 81.876, otherwise this count is invalidated and, as pointed out in the last update, it will appear that wave (ii) is continuing to lower levels - the 61.8% or 78.6% retracement of wave (i).

I've drawn in a new base channel, assuming we've seen the low of wave [2]. If going long, you wouldn't really want to see this channel broken to the downside, although false breaks can, of course, occur. Still, if I wanted minimal risk, I'd use a break of the channel as a signal to exit a long. Technically, however, the level at which to stand aside would be below 81.876.

Once again, if we've bottomed in wave [2], then we'd have to see price  behave in a manner that is consistent with wave [3] up. As long as it fails to do so (like the 3 wave rallies it was putting in following my last post), the risk of further downside remains. While that may be limited if we're in wave [2], its potentially alot greater if we're actually still in wave (ii), so sensible stops are, as always, vital.