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Advanced Technical Analysis - Intraday Flash



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.

There is little new to say about the technical condition of either the SPX or the INDU that we did not write about in yesterday's note: we said that, given the very short term divergences, a counter trend bounce was possible but that, given the larger bearish trend in force from the October (September for the INDU) peaks, such a bounce would need to be capped by important resistance at 1117-1126 and 10026-100120 in order to keep the intermediate term trend bearish for thee indices.

For now there is no change to our bearish view in the SPX and INDU - only a move through 1128 and 10241 would negate this bearish view and force us to stand aside. The NDX however, as most readers are now aware, has outperformed remarkably over the last few weeks. To be fair, the outperformance has actually been taking place from the 8/13 lows: to that date, the NDX was down 17% from its 2004 peaks while the INDU was down 9%. As of yesterday, however, the NDX gained all that underperformance back and then some, down only 6% from its peaks vs. the INDU's 9% decline. An 800 basis point underperfomance to a 300 basis point outperformance YTD is impressive, and it has certainly caught everyone's attention. Does this impressive NDX performance alter the view on the SPX or INDU. The short answer is no. Does this NDX performance change the intermediate term call for the NDX we have been making: that this index is in a bear trend? Possibly but not probably. Let us explain.

At the October 7th peaks in the NDX, we cited (1) a potentially completed corrective bounce back to the important Fibonacci resistance point of 78.6% (which stands at 1476), (2) a daily Demark trend exhaustion indicator along with hourly indicators, and (3) significant divergences in momentum, ticks, and breadth. Each of those suggested the probability for a decline (an impulsive decline) was high. The subsequent 4 day, 4% decline "looked" very much like a "5" wave move down so we laid out one more condition for the intermediate term bear trend to be confirmed: a decline below 1397. Such a decline never materialized but, given the bearish SPX and INDU patterns and the overlapping waves up from the 1416 October 12th NDX lows, such a decline seemed high probability. And it seemed imminent.

We were wrong. The low probability event took place yesterday: a move above the peaks from 10/7, triggering our stops. The question for us now is thus: is the NDX leading the rest of the market and thus portends new SPX and INDU bull trends or has the NDX simply bounced in a deep but ultimately corrective manner and is now getting "in gear" with the INDU and SPX bearish trends? For this market at this time, this is the single most important question to answer.

There are several things we need to think about to come to some sort of reasonable answer to this question. First: what does the Elliott wave pattern suggest? On this score, there are two "counts" that are valid: (1) the move up from the August 13th lows counts as a double zigzag (ABC to 9/21 peaks, X to 9/28 lows and another ABC to either yesterday's peaks or slightly higher) or (2) it counts as a series of nested 1-2 waves that portend prices are within an extremely bullish wave 3 toward new annual highs. Given the technical breakdowns that took place within the decline from the Q1:04 NDX peaks, such a remarkably bullish assessment is low probability. It is made even more of a low probability when viewed within the context of the universal bullishness readings from MBH commodity advisors bullish readings, Institutional Investor Bull/Bear readings, etc; they are at levels near or equal to all the peaks this year, which means as high as they have been since the bounce from October 2002. Furthermore, the daily Demark trend exhaustion indicator from early October remains very much valid: add to this the daily momentum divergence at yesterday's peak plus the hourly divergences in ticks, breadth and momentum for the NDX.

These technical underpinnings are decidedly not the stuff of a large and very bullish third wave advance. So if we can reasonably conclude that the NDX is not in a very bullish 3rd wave up, can we in fact "see" an Elliott wave pattern that fits the Demark and momentum/breadth/ticks bearish indicators? Yes. In short, the double zigzag corrective bounce from the 8/13 lows counts well, which is to say that it has "nice internal Fibonacci relationships at two important price levels: 1478, and 1515. At 1478, the first zigzag is 1.37 times the second zigzag in terms of price, this is remarkably close to 1.382, one of the important derivatives of phi (0.618). Further, at 1478, within the second zigzag up from the 9/28 lows, the C wave = 0.63 the length of the A wave (again, close enough to an important 0.618 phi relationship). 1515 holds some potentially important relationships as well. At 1515, the second zigzag would be equal to the first in terms of gain: 139 points. But 1515 would be a mere 8 points away from the June NDX peaks; such a "deep" retracement of the impulsive move down from the June peaks would be a rare occurrence and would stretch the bearish Elliott wave interpretation of the peaks in Q1:04 being the bear market bounce peaks from the October 2002 lows.

Nevertheless, give all those above considerations: 1478 and 1515 remain very very important price levels that "need" to hold the NDX advance in order to keep the bearish intermediate term trend alive for the NDX. Fibonacci-based technical analysis is, at its heart, a probability-based exercise. Given the daily Demark trend exhaustion signal, the hourly momentum/breadth/tick divergences, the 10/19 note we published showing the NDX's outperformance was getting mature, the high level of existing bullishness, and the Fibonacci relationships within a possible double zigzag from the 8/13 lows at 1478 and 1515, we think the probability that the NDX remains in a bearish long term trend off the Q1:04 peaks is high (not advice).

As we are writing this, the NDX is down 1.3% from yesterday's 1478 peaks in what may turn out to be a developing impulsive wave down. If it does turn into a "5" down, and then takes out 1454 and 1434, traders can reasonably conclude that indeed the bearish trend is operative. Stay tuned: should the NDX break hard here, the downside targets are substantially lower. Parenthetically, we would note that the last time the NDX made a 30 day new high while the INDU was making a simultaneous 30 day new low was March 7th, 2000.

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