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Advanced Technical Analysis - SOX

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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.

In our last published note on the SOX, dated September 15th, we noted that the bounce from the 9/8 lows had the markings of a corrective counter-trend move that could fail anywhere between the 38.2% and 61.8% Fibonacci resistance points.

The price action over the last week has strongly suggested (as our high confidence rating indicates) that that corrective bounce, to 413.13, is now complete and the SOX is in the early phases of its next impulsive move lower, toward 327 at least with potential toward 310 and lower depending on "how" the action unfolds from an Elliott wave and Demark perspective.

Specifically, the bounce from the 9/8 lows took the form of a double zig zag (two "3" wave moves up connected by a 3 wave move down between them, with notation ABC-X-ABC). The first zig zag took the SOX from the 9/8 lows to the 9/21 peaks, the "X" wave declined from 9/21 to 9/28, and the second zigzag took prices from the 9/28 lows to the 10/1 peaks at 413.13. At 413.13, the 4th wave bounce carried to just beyond the 38.2% Fibonacci retracements point but just below the 50% retracements point, right in the heart of the important resistance area we cited in our 9/15 note. The move down from the 10/1 peaks traced out a clean looking "5" waves to the lows registered on 10/12. Yesterday's bounce (which may or may not be the entirety of the corrective bounce the SOX will see) carried to almost precisely the 61.8% Fibonacci resistance point of the impulse move down from 10/1 to 10/12.

The most important observation we can make technically is the wave form that the SOX has taken from the 10/1 peaks. What this suggests is that the dominant trend is now down, and given the overlapped correction up to the 10/1 peaks, we can then infer that the 4th wave bounce we were looking for off the 9/8 lows is now complete and that new lows beneath the September lows are imminent.

There are a number of acceptable ways to "count" the SOX's Elliott wave pattern off the Q1:04 peaks but even the most conservative (read: least bearish) calls for the SOX to potentially decline at least to 327 over the next handful of weeks if not carry lower to the 310 +/- area. Both are Fibonacci projections from the important peaks and troughs that have taken shape over the last six months.

In the short term, we cannot determine with high confidence if the bounce that started on 10/12 has "completed" or not yet. It is possible that the SOX will make another stab at a new peak above the 399.67 level achieved at yesterday's open. If trade were to come under 380 at anytime that would be strong evidence that the bearish move toward 327 or even lower was underway. If trade were to power levels through the 10/1 peaks at 413.13 we would then need to reassess the technical analysis. Recall that our major degree analysis for the SOX is that it could, in time, take out the 2002 lows as its bear market matures in 2005 and 2006 (not advice).

No positions in stocks mentioned.

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