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.
In Thursday's note we suggested there were two interpretations of the current technical action: (1) our preferred (70% probability) interpretation of a 3rd wave down starting from the peaks on the 18th which should, in time, easily slice through lower Fibonacci support or (2) the possibility (which we posited was 30%) that the entire move down from the peaks on January 3rd was a correction that should find substantial support in the SPX 1169-1172 and NDX 1515-1520 area.
Friday's action witnessed a continuation of the sell-off from earlier in the week, closing bottom tick on the day on better than average volume; down vs. up volume however was not confirming the new lows nor was short term momentum. As you can probably see clearly on an intraday chart since the 18th, there are 5 waves down from those peaks. It is probable that prices see some sort of corrective bounce in the short term to 'correct' this small degree impulsive move down, possibly closing the gaps that remain open at SPX 1185 and NDX 1546. If the bearish interpretation is correct (and again, we place a high degree of probability that it is), then closing these gaps will be a 'kiss goodbye' for the market and should result in a serious decline in prices that could very well startle the bulls on the Street (not advice). 3rd waves down are usually the most violent of all the waves within an impulse wave.
If that is what is underway, the next leg down should be the most intense selling of the year so far. Bear in mind however, that should a short term bounce to fill those gaps materialize and go well beyond those gaps to the upside, that will decrease our confidence in the immediately bearish interpretation. So therein lies the dividing line between the bull and bear interpretations: for the bearish case to remain high confidence, any bounce that develops should not move materially beyond those open gaps.
With respect to the bearish analysis, we're keeping stops at the lowered levels we cited in our Thursday note: SPX 1193, NDX 1565, and INDU 10615 and RTY 625. Positioning for weakness off any bounce to the NDX 1530-1546 area, SPX 1178-1185, and INDU 10480-10540 is a good risk reward scenario using the same stops (not advice)
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