Advanced Technical Analysis
Note: the following analysis is formulated as an assimilation of Fibonacci, DeMark, Elliott Wave and other technical indicators. It is offered as education and not intended as advice in any way.
Positive short term divergences continued to accumulate both Thursday and Friday last week: ticks, breadth, volatility and momentum all registered non-confirmation of the retest lows that the markets put in on Thursday (the INDU actually did make a slight new low - a positive intramarket divergence). Just as the market showed resilience on the way up in December despite the accumulation of bearish divergences, the same can happen - indeed looks to be happening - in this present bearish trend.
Our technical conclusion however remains the same as last week: despite the confidence we have in the larger trend being decidedly bearish here, we are still looking for a mean-reverting, corrective bounce to take place that should take prices back to some higher Fibonacci resistance. That point, should prices get there, would represent a very attractive risk/reward favoring the downside. Having said all that, we do not want to lose sight of the fact that the trend is in fact bearish and down.
Surprises (i.e. low probability outcomes), should they happen, will tend to be on the downside given that the larger degree trend is now down from the peaks on January 3rd. But again, shorting at these price levels does not represent a good risk/reward trade in our view despite the fact that we feel confident that the larger degree trend is now down (not advice). Should prices drop precipitously from here, it would imply that the counter-trend bounce we were looking for last week already took place and merely produced a net sideways movement from Tuesday to Friday of last week. Such a correction, though rare, certainly happens, and we don't want to dismiss it. But trading as if that rare sideways correction has taken place is, at least at current prices, a low risk/reward trade. Better to either have prices (1) move up sharply to Fibonacci resistance or (2) to break down hard from here in a developing third wave and trade in that resulting direction than to position for the downside right here with the accumulated bullish divergences we just mentioned. Net/net then, no change from our analysis from last week: we're expecting a fairly healthy bounce for several sessions to take us to higher resistance.
Once there we will look for the opportunity to position for lower prices (not advice). If prices do decide to break down immediately Tuesday, we will conclude that last week's sideways correction was THE correction and then establish positions for the move to lower supports (at least 3-5% lower than Friday's close). For now, patience remains key.
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