Saturday, 13 November 2010

13:19 GMT - SPX Weekly and Daily charts

As you can see from the 60 min counts page and the intra day updates, I can count the rally from the August low as complete at 1227.08 or that high can be counted as only the 3rd wave up from the August low, so after a pullback in a 4th wave, we'd see a new high above 1127.08 before the rally is complete.

Personally, I prefer the first interpretation. However, in terms of wave behaviour, as I said in yesterday's end of day update, although I can count an impulse wave complete or nearly complete at yesterday's low, that move down from 1227.08 could just as easily be counted as a double three, which favours more upside. Further, in terms of price, we haven't yet breached any levels that would weight the odds in favour of the bear case. Indeed, the price levels that would really start to favour the bear case are so far below us that unless we get a stunning collapse, it could be a while before we can really begin to think that the bearish case could be the one that's playing out.

As you can see from the 60 min counts page, there are a number of ways to interpret what an end to the rally from the August low might be.

If we've topped in wave X or B on Option 2, then we could well see a fast and furious decline very soon.

If Option 3 is playing out, then, in reality, until we take out the low at 1039.70, the three bullish (of varying degrees) interpretations of that Option will remain very much on the table, though the least bullish one would be eliminated if we were to take out 1129.24.

Still, there are reasons to think that we may be in for a decent pullback soon, if we haven't already started it.

SPX Weekly:

Looking at the weekly chart, Friday's close meant no follow through to what was a very bullish bar the previous week which closed pretty much at its high. Its rarely a good sign when a bar that closes at its high or low fails to follow through on the next bar.

As you can see, that failure occurred at the median line of the green and blue pitchforks and the week closed below both. However, the question is whether that's a terminal failure (at least near term) or whether we're just coming back down to test the 200 ma that was broken above on the prior week's bar.

Well, the weekly indicators may, in the main, be suggesting that more of a pullback could be on the cards. The CCI is still rising, but could just be double topping below the zero line. There's bearish divergence in the RSI and the MACD histogram printed a lower high bar after the prior week's bar had managed a higher high. The stochastic is also more consistent with a pullback coming than with more significant upside.

However, by the end of next week, I'd really want to see the CCI actually turn down from the zero line, the MACD also start to turn down and the stochastic break down below the 80 line, with the RSI continuing on a downward path and the MACD histogram printing another lower high bar. I'd want to see this with another negative close for the week that closes below this week's bar.

The daily chart seems to suggest that this is possible:

SPX Daily:

The green and blue forks are those shown on the weekly chart. You can see more clearly here how price has bled up along the median line of the blue fork. To me, that does make the failed break above it seem even more bearish.

The indicators would suggest that more downside should be seen into next week, with bearish divergences showing up against the April high and/or within the rally from the August low itself.

However, if we do see further declines next week, these indicators really do need to confirm, with the CCI heading down quickly to below zero, the RSI breaking below 50, the MACD descending down to, and preferably below, the zero line and the RSI breaking down below its 50 line.

I wouldn't want to see such moves in the indicators occurring while price only moves sideways. I'd consider that to be more bullish than bearish.

Essentially, what it comes down to is that the weekly bar now has to do what the prior weekly bar failed to do, namely, follow through. 

The problem is that, as you can see from the daily chart, we're right at an area of price support which coincides with the 20 ma (as well as the 200 ma on the weekly) - see the yellow highlighted area on the daily chart. It may take a gap down to break through that support and that would certainly begin to look pretty bearish. However, while we hold that support, the benefit of the doubt, logically, must be given to more upside, whatever the indicators on the weekly or daily charts might be suggesting.

11:50 GMT - 60 min counts page updated

I've updated the 60 min counts page commentary to clarify a couple of points with regard to the two Options shown:

First, in relation to Option 2, if the waves labelled W and X are actually A and B, we'd be looking for a 5 wave move down in wave C rather than a 3 wave move down in wave Y. I'm not sure it makes much difference to the ideal target for the end of the decline once we've topped in the rally from the August low (which we may have done at 1227.08). However, its something to be aware of if we do get a large 3 wave decline which looks like wave Y since, if its actually a C wave, there'd be more downside rather than immediate upside.

Second, in relation to Option 3, I've listed four ways to interpret this Option. I'd previously listed three, but within the first one, there were two possibilities mentioned, namely that the rally from the August low is either wave (i) of [iii] of A or wave [iii] of A. I've simply listed the second one as a seperate interpretation since its considerably less bullish than the first one.