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Advanced Technical Analysis

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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.


For the last several weeks our notes have focused on two things: (1) we have suggested patience on the short side and (2) we have repeated that the long side is very risky given the technical evidence that was accumulating. That message was repetitive, frankly boring and at times frustrating to even write. But it was also prudent.

Why? Because in the last two days of price action, the NDX has given back every point gained in the entire month of December. 2 days wiped out 30 days' worth of returns. Were some traders able to deftly play the long side for that period and sell before 10 am Monday? Perhaps a few. But making a foundation of such razor's breath timing is imprudent in the extreme if for no other reason than the simple fact that such strategy is high risk and low reward over a career of investing or trading. Which was the original reason we stayed cautious throughout December despite the seeming 'obviousness' of the bullish trend and the positive seasonal factors.

It is axiomatic that such 'obvious' facts are dangerous to trade; and though the self-reinforcing nature of such biases (like seasonality) can be enticing, such a strategy has costs that accumulate rapidly over a lifetime of investing. With that, you almost certainly don't need us to tell you that the last two days have produced price action that is markedly different than any we have seen since the October lows. Swift, momentum- and volume-driven declines that easily took out Fibonacci supports and produced impressive TRIN numbers. But more importantly than all of those of course is the form of the price decline, which we highlighted was the single most important factor in helping us determine what type of degree of trend change would be imminent.

For now most of the indices look to be in the final stages of tracing out that all-important "5" wave decline that suggests that an impulsive (and thus trend-changing) move down is afoot. The NDX has the clearest short term (13 minute charts) pattern, having most likely put in a 1-2-3 waves down with a 4th wave bounce expected soon before a minor fifth wave down ends and results in a 1-3 session bounce. Should this "5" wave pattern play out to the downside (and all the other technical data we watch suggests it is a strong probability) in the next few sessions, then that would be the first confirmed sign that an important change in trend took place at Monday's peaks in all three indices. The analysis suggests awaiting such a "5" wave move down and the resulting 1-3 sessions bounce back to Fibonacci resistance before attempting to aggressively press the short side (not advice).

And if the pattern plays out in that "5 down and 3 up" manner, the analysis suggests being as aggressively short as we ever have, which we believe is warranted thanks to the records of sentiment and overbought extremes along with the conjunction of DeMark indicators at the recent peaks (not advice).

For now, we'll wait for one more down-up sequence to play out in all the indices to create a distinctive "5" wave move down (follow the NDX as it seems to be forming the most typical "5" wave move). Once formed, we will then provide another view of the parameters. For now, the aggressive approach suggests weakness from any bounces while the conservative approach should await a clear "5" down on short term (13 minute) charts. Stay tuned, the price action over the next several sessions could very well have implications for the entire 2005 year.

No positions in stocks mentioned.

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