Wed 8/31/2011. DRSI redux.

Dynamic RSI has good potential and even led me to expect a potential run at 1220-1233 among other things. Likewise, SPY 5min volume spikes have shown promise. But, I feel like I've let myself get pulled into the weeds recently. My System focuses on the daily level with its indicators, cycles and moving averages while finding entries and exits at the hourly level. I don't think mixing in 5min volume and 15min DRSI is a good fit at the moment especially since I already know lower level DRSI has a larger margin of error.

I decided to take a step back and review DRSI and volume at the 60min level to better match my System. Here is what I found.

1. Based on DRSI, SPX could still be forming wave 4 from 1356, not 1371. There were several reasons I thought 1121 may have been a truncated 5th, but I openly admitted the DRSI interpretation was a little fuzzy. But, on my 60min chart, DRSI45 makes the assumption that SPX would test its lows in mid-September, and the RSI level seen at 1347 is being tested now. Even if I assume a low around October 1st using DRSI54, there is little room for SPX to run under this count. So, basically, if SPX rises much further with RSI strength, we will have confirmation that 1356-->1121 ended a structure. And, BTW, one of DRSI strengths has been identifying s/r levels. We're basically at resistance now, and although RSI can diverge with price for a while, SPX should be at or very near a short-term top. Daily DRSI confirms this finding.

2. SPY had its largest hourly volume bar since the 1136 low just before the close, and it was the 2nd largest hourly volume since the 1121 low. However, it happened on somewhat of a reversal bar off of the 1209 low so it's difficult to determine if there was strong buying interest or just shorts covering on the largest dip in days. Each interpretation would have different short-term results, so it doesn't help me much.

My primary and secondary counts (which I am leaving unchanged for now) as well as DRSI, Fib 50%, overbought daily indicators, the ultra-low ISEE on Tuesday and a parallel channel that was touched precisely today all suggest an imminent top and can be seen on the 60min chart. Cobra provides a few more reasons. See his link on the right. However, probably most importantly, my System cycle low is expected to occur on Sep 7 +/-. That is now just 4 trading days away. The window extends beyond Sep 7, but, based on past cycles, a rally into the last few days of a cycle usually leads to a sharp drop even if it's only for a couple days. The low can be a higher low even though that's not what I'm expecting. A convergence of support appears to exist around 1187-1191 and 1163-1176 on the 60min chart due to recent pivots, the 89hEMA/SMA, 20dSMA, triangle backtest line and 50-62% Fib retracement of 1102. If we get a pullback into support, we'll need to evaluate the indicators for clues of a bottom. Also, my spending analysis projected a significant low either this week or in the next 2 weeks. So, I will now be looking for strong bottoming indicators to get long. I expect that rally to fail too, but there is a chance it will backtest 1260-1300 if we get a higher low. Good luck.