Thursday, 28 October 2010

21:12 BST - SPX End of Day Update

The action today leaves open the question of whether the bullish or the bearish count is playing out, that is, whether we've seen a top to the rally from the August low or whether there's still more upside to come.

Here's how the counts look to me (the bigger picture is on the 60 min counts page where the bearish count is shown on the charts of Options 1 and 2 and the bullish count is shown on the chart of Option 3):

Bearish count:

SPX 1 min - bearish count:

This [1]-[2]-(1)-(2)-1-2 is what I'm going with for the moment. Wave 2 must stay below 1189.53. I've labelled it as complete at 1185.30 which is just over a 61.8% retracement.

However, we now need to see an impulsive move down for some sort of confirmation of this labelling.

If we take out the 1189.53 high that invalidates the count. It would still leave the [1]-[2]-(1)-(2) intact, but that would be invalidated above 1191.44. 

I'd then be left with the count for 5 waves down from 1196.14 that I showed on Chart 2 in yesterday's end of day update. For that count, the high of 1196.14 would be the invalidation point.

Bullish count:

SPX 1 min - bullish count:

On this count, I've labelled it as if we're in wave [E] of the triangle, but as mentioned earlier, we could still be in wave [D], in which case, expect the high at 1189.53 to be taken out.

On this count, the high at 1196.14 shouldn't be exceeded until we complete wave [E] and wave [E] mustn't drop below the low of wave [C] - that's at 1171.70 on this labelling. So, those are the levels to watch on this triangle count.

If the 1171.70 low is taken out, I'll be thinking its likely we'll see more downside in wave iv, possibly down to the 38.2% retracement level at about 1152.

I think at the moment we're in a quite difficult position. 

On the one hand, price action is such that it favours more upside simply because we haven't seen any truly decisive downward movement, plus of course, the trend is still up. This suggests caution is required on the short side.

On the other had, various technicals (see for example the charts I posted earlier today - click here) make a strong case for at least a pullback, suggesting caution on the long side.

The only thing to do is to indentify important levels on whatever count you're following and use them to let the market tell you which way it might be going.

On the counts as I've labelled them, the levels I'm watching now are 1189.53, 1191.44 and 1196.14 on the bear count (above any of these levels I'd consider the risk of more upside to be high) and 1171.70 on the bullish count (below which I'd think the risk of more downside increases).

18:31 BST - SPX Update on the bullish count

Here's an update in the bullish count - note that we may still be in wave [D] rather than in the middle of wave [E] of the triangle. If so, we're likely to take out the 1189.53 high in wave (Y) of [D]:

SPX 1 min - bullish count:

17:55 BST - SPX Update on the bearish count

Here's an update for the bearish count posted earlier (I've upped the degrees by one):

SPX 1 min - bearish count:

For the main count, wave 2 must stay below 1189.53. If we take that out then I'll be left with the count for 5 waves down from 1196.14 shown on Chart 2 of yesterday's end of day update.

If the alternative count is playing out, we have to stay below the wave 2 high at 1183.53 in wave ii.

15:26 BST - SPX Update on the bullish count

Here's what I'm looking at on the bullish count:

SPX 1 min - bullish count:

If the wave (1) high at 1179.52 gets taken out on this current decline, then we'll have 3 waves up from the low labelled iv, which makes the triangle option look more likely for a continuing wave iv. We'd have to stay above 1171.70 to keep that option intact, assuming that's wave [C] of the triangle with today's high being wave [D].

If we take out that low and then also take out 1171.17, I'll be thinking wave iv is forming an expanded flat with a subdividing [C] wave as mentioned in yesterday's end of day update.

14:46 BST - SPX Update on the bearish count

On the bear count, the count  shown on Chart 1 in yesterday's end of day update has been invalidated with the move above 1187.11. That leaves the count for 5 waves down from 1196.14 which I showed on Chart 2 in yesterday's end of day update, which means the bear count stands until we take out 1196.14. Or, there's this count which is invalidated above 1191.44:

SPX 1 min - bear count: expanded flat for wave 2 of (3) down:

So, 1191.44 and 1196.14 are the levels to watch to keep the bear count alive.

11:45 BST - SPX: Indicators and Internals still suggesting conditions are in place for a pullback - confirmatory price action still awaited

These charts, updated from the last time I posted them on 22 October (click here to view that post) continue to suggest that care is required on the long side:

SPX Daily:

The comments made in that last post with regard to the indicators on this chart continue to apply as price remains stuck around the median line of the pink pitchfork.

CBOE Equity Options Put/Call Ratio:

The 5ma has moved decisively above the 10ma and the latter is trying to break above the pink downward (bullish for the market) channel.

The McClellan Oscillator failed to make a new high with the market once again, simply backtesting the broken green upward channel and the zero line. It still paints a bearish picture.

SPX Percent of Stocks Above the 50ma:

The sell signal triggered on 19 October remains in force, but we now have the 13ma now appearing to roll over, which should reinforce the signal.

NYSE Tick:

The bearish divergence on this chart continued as the market shot up to the 1196.14 high, so, still indicates internal weakness.

In light of all of the above, short trades do seem to have a good risk reward, provided (and this is crucial, of course) proper stops are placed. This is because despite everything shown in the above charts, we still haven't seen any decisive downward action to confirm what these charts are suggesting. Until we see that, the trend remains up and these divergences and bearish configurations can feasibly continue and/or work themselves off as the market goes sideways or grinds higher.