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Advanced Technical Analysis

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You will recall that we had three conditions that would allow us to grow confident on the larger degree (multi-week/month) bearish view we made last week: (1) a completed "5" wave move down on short term charts from last week's peaks; (2) a 3 wave bounce from such a "5" wave low that fails at Fibonacci resistance; and (3) a subsequent decline beneath INDU 9980, SPX 1110, and NDX 1397.

Wednesday AM's note suggested that we should be on the lookout for a 1-2 session bounce to important Fibonacci resistance at SPX 1125-32, NDX 1440-1453, and INDU 10120- 10173. Prices indeed moved into those resistance areas on Wednesday's open, peaking at SPX 1127, INDU 10127, and NDX 1453, before dropping again impulsively. That action fulfilled the second important condition of our Monday litmus test. Thursday's action continued the decline, breaking below the key levels of SPX 1110 and INDU 9980, which was the third and final condition for our larger bearish outlook.

You will note that the NDX did not, however, drop below its key level at 1397. Is the NDX just holding out and lagging the SPX and INDU in its bearish trend or is there something "telling" in the NDX's relative strength? The answer is: possibly. The fact that the NDX has so far failed to break below its similar Fibonacci support levels, when combined with the observation that yesterday's breadth and ticks were not lower than Wednesday's (a non-confirmation) and the fact that hourly Demark trend exhaustion indicators have or are very near registering in the SPX, INDU, and NDX, suggest that the "1-2 session bounce" we cited in the Wednesday AM note may still unfold toward those higher Fibonacci resistances.

Can we interpret the Elliott waves of the three indices in such a manner as to support the call for a bounce that challenges important Fibonacci resistances? Yes. But so too can "see" an Elliott wave interpretation that calls for the indices to continue their (at least in the INDU and SPX) clear downward trend. At times like this, when there are conflicting short term technical clues being offered for interpretation, we must refrain from being Pollyannaish or dogmatic. Make no mistake however, whether a bounce to Fibonacci resistance takes place or not in the next few sessions, the larger trend from last week's peak remains bearish and the most probable interpretation of the larger degree time frame (multi-week/month) remains bearish towards new annual lows.

Our "confusion" only lies in whether we see some sort of mean-reverting bounce in the next few days before the bear trend starts anew or whether it simply keeps falling as it has for the last week. Markets are not "one-way", so we must be aware of the potential for a bounce.

No positions in stocks mentioned.

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