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.
The breakdown yesterday and the follow-thru today with the gaps lower, prima facie, bolsters the bearish case we have been making. If our bearish call is correct, we are in a third wave decline that should accelerate lower over the next few weeks. Momentum, ticks, breadth: all should record substantial (confirming) new lows in this decline and important Fibonacci price supports should give way with ease (not advice).
The bearish view we outlined yesterday may lend itself to lowering stops to the intraday peaks from yesterday (1/19): they are SPX 1193, NDX 1565, and INDU 10615 and RTY 625 based on the analysis. The benefit of the technical indicators we use is that price action needs to 'confirm' the prevailing view. If it does not, then the probability that that view is wrong increase. In that spirit, the very bearish interpretation we have remains the most probable. But we want to lay out for you what would make us lose confidence in this view.
Specifically, the price level of SPX 1169-1172 and NDX 1515-1520. If these price levels hold over the next few sessions and create an impulsive looking move up that exceeds the stops we mentioned above, then that would seriously weaken the prevailing bearish 'third wave down' view of the indices. Indeed, it would augur for a perhaps smart rally from here (the details of which we will go into only if we meet these conditions.)
So for now, our bearish view rests on two conditions: the SPX 1169/72 area needs to give way impulsively to the downside over the next few sessions and that any bounce that develops today or tomorrow does not exceed SPX 1193. Should that occur, the 3rd wave down thesis would be considerably weakened. We want readers to be aware of this potential, even though we consider it a low probability, because throughout 2004, there were a few times that we felt the technicals suggested a very bearish 3rd wave down was afoot, only to have it thwarted by a rally that turned out to be meaningful. If that happens (yet) again, it is probable such a rally would take place from SPX 1169/72. Let's keep a close eye on trade over the next few sessions. It should confirm - or deny - the very bearish view we currently hold.
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