Tuesday, 14 September 2010

22:43 BST - SPX Update: 60 min bearish divergences - but more is required for the bearish outlook

The divergences which were apparent on the 60 min chart yesterday (see here) persisted today against the new high for the rally from the August low and we're starting to see the indicators rolling over:

SPX 60 min:

The weakness suggested by the failure of price to get back above  the median line of the fork last week and its failure to even reach it yesterday seems to have been confirmed by the additional failure today. We may now be seeing a breakdown out of the fork, although its too early to tell if this is going to be of any significance.

Still, this all provides a reasonable foundation for a down move (we can't say what it will be in terms of elliott wave counts until we see how it behaves). 

However, for the bearish case, we do need to see more confirmatory moves in the indicators on the next decline. 

The RSI needs to get below 50 and  then move quickly to oversold, with price also moving down (if it gets to oversold without any real downward price action, that's potentially bullish, as is not getting to oversold on a down move). The CCI needs to move swiftly below the zero line and fail on any re-test from below, before falling below the -100 line. The MACD needs to cross below zero. The stochastic needs to get down to oversold and preferably stay below the 50 line on rallies. The -DI line needs to start moving up and must cross above the +DI line and be confirmed by a rising ADX line.

So, the divergences we're seeing between the indicators and price is only half the story. To have any confidence that we've seen a significant top today, we now need to see movement in these indicators that confirms. Until they move to bearish levels (along with price dropping, of course), the risk remains that any price decline we see is only corrective and that more upside will follow once the bearish divergences have been worked off.

21:18 BST - SPX End of Day Update

Although another new high for the rally from the August lows was put in today, we remain below the 1129.24 level on SPX, so the bearish [i]-[ii]-i-ii count has survived another day.

Its possible that its finally complete at today's high with wave [C] of wave ii as an ending diagonal which started at 1040.88. It really doesn't have a great deal of room left if it didn't end today. Still, if we do take out 1129.24, the bear case will survive with the count that has us in a zig zag up from the July low. That could be counted as complete at today's high, with 5 waves up from 1039.70. 

However, on both of these counts, we have to see some really impulsive downside movement to confirm because, the diagonal or 5 waves up that can be counted as complete would represent the next impulse up in larger rallies on the bullish counts under Option 4 (see charts 2 and 3 in the update on the bullish counts posted last Thursday).

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

Price action continues in such a way that both bullish and bearish counts remain open. I'll show the wave counts on the charts of the bearish case but keep in mind, as I've said above, that a complete diagonal or impulse up from the August lows could be part of the larger rallies anticipated if the bullish counts are actually playing out.

Chart 1: SPX 1 min - ending diagonal from 1040.88:

This shows the whole of the move up from 1040.88 as an ending diagonal for wave [C] of ii. Wave (4) didn't overlap wave (1), but the EWP book suggests that that can happen and since it otherwise looks like a diagonal, with the overlapping waves, it would seem to be OK to label it as such.

As you can see, its possible to count it as complete today. If its not complete and wave (5) is still playing out, it has to stay below 1129.24, otherwise the [i]-[ii]-i-ii count is invalidated.

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

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

Chart 2: SPX 1 min - ending diagonal from 1040.88:

As you can see, I've tentatively labelled a wave 1 down complete from today's high. This would be the start of wave iii of (iii) down on this count. Obviously, the invalidation point for this count is today's high.

I think that if we can take out the low at 1115.58, that will improve the odds for this count. Taking out that low would avert the possibility that the alternative labelling that has us still in wave (5) is playing out. That's  because wave (5) has to be a zig zag and taking out that low would mean the move up from 1115.58 is not a zig zag.

If there is more upside to come and we take out the high at 1129.24, then that will invalidate the overall [i]-[ii]-i-ii count. As explained on the 60 min counts page, that would still leave a [i]-[ii] count (so we'd be in wave [ii], not wave ii). However, as I've said over the last few weeks in the updates to the 60 min counts page, if that happens, I would certainly favour the count that has us in minor 2 in the form of a zig zag up from 1010.91. (Option 3 on the 60 min counts page). As mentioned a couple of weeks ago, that count is probably looking better anyway, even if we don't exceed the 1129.24 high.

Here's the count for 5 waves up from 1039.70 which would apply to the zig zag up from 1010.91 (and also to the bullish alternate counts shown under Option 4 on the 60 min counts page):

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

As you can see, this count for 5 waves up from the August low could be complete at today's high. However, the alternative labelling suggests we only completed wave [3] of v at today's high, so still have another high to come.  If we take out 1110.27 (the wave [1] of v high) without making a new high, that possibility will be eliminated. 

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

1) for the [i]-[ii]-i-ii count, we need to stay below today's high if wave ii completed today. If not, we have to stay below 1129.24. If we take that out, this count is invalidated;

2) if we completed wave ii (shown in charts 1 and 2 above) or wave 2 (shown in chart 3 above) today, we need to see price action to confirm: we need to stay below today's high, but we also need to see decisive and clear downside action consistent with a 3rd wave down. As yet, we haven't seen this, though the late sell-off today may be the start of it. Taking out 1101.53 in an impulsive move might help to increase confidence in this possibility, but I think it would have to be followed swiftly by a move below 1091.15;

3) if we take out 1129.24, that will focus attention on the zig zag from 1010.91 count and the bullish counts under Option 4. That zig zag would be minor 2 up, as shown in the update posted on Thursday,  and its 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 wave (i) of [c]  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 bullish counts under Option 4 (although they remain potentially in play in some other form until 1010.91 is taken out).

17:37 BST - SPX Update on the [i]-[ii]-i-ii and zig zag counts

So, taking out yesterday's high means wave ii on the [i]-[ii]-i-ii count didn't end then. 

From today's low its possible to count a double zig zag:

SPX 1 min - ending diagonal for [C] of ii:

However, it also possible to count the rally from today's low as 5 waves, which would be only wave A of (4) on this count. If that's the case, then on the next pullback we have to stay above the low at 1115.58. This is because wave (4) has to be a zig zag. This means wave B can't take out the low of wave A.

If we have completed the diagonal then we need to drop in a manner that is consistent with that. So far we haven't, so there must remain doubt on this.

Remember, this count is invalidated above 1129.24. 

If it gets invalidated, the bear count becomes the zig zag from 1010.91, which is currently labelled as being in wave [c] up:

SPX 1 min -  zig zag from 1010.91:

The 5 waves up from today's low that I've labelled on the first chart could well be the final 5 waves up within wave [5]  of v. Although I have it labelled as being only the first wave of [c], as I've said before, and as shonw by the alternate labels, its more than possible that its the whole of wave [c] (even if we don't take out 1129.24) so once this rally from the August low ends, minor 2 would also be at an end.

Today's high would be a nice level for the end of wave [5] since at that level, wave [5] is 1.236 x wave [1]. Also, at this level wave v is just about equal to wave i.

If today's high does complete 5 waves up from 1039.70, then a retracement at least is due. We'll just have to monitor how it moves down to try to determine if we saw the end of minor 2 or if it was only wave (i) of [c] of minor 2, with more upside to come.

14:53 BST - SPX Update on the bearish count and 5 waves up from 1039.70

The initial decline today seems to have marked out the rally from yesterday's low as a 3 wave move. Still, it could just be part of a wave (4) correction. Here's the ending diagonal/double zig zag count (see chart 1 in yesterday's end of day update for more context):

SPX 1 min - ending diagonal or double zig zag:

If we're still in the ending diagonal, wave (4) needs to stay above the orange dotted line I showed last night which is at about 1105-ish.

If we completed a double zig zag for wave ii at yesterday's high, we need to get down below 1101.53 (for starters) in a clear impulse wave.

On the count for 5 waves up from 1039.70 (see chart 3 from yesterday's end of day update), if this is wave (4) of [5] of v, we need to stay above the wave (1) high at 1110.27, otherwise, the count that shows a top for wave v at yesterday's high will start to look more likely. However, taking out 1105.15 would add more weight to that possibility. Here's the close up of that:

SPX 1 min - 5 waves up from 1039.70 close up:

In my view, until we take out the levels mentioned, the risk remains to the upside.