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Advanced Technical Analysis: NDX

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Today we're taking a close look at the NDX pattern off the last week peak of 1478. My approach hinges on the "waiting for an impulsive (5 wave) move down to signal a trend change before attempting to press the downside. In so doing, we are guilty of assuming that you have as intimate a view of what a "5" wave decline looks like on the short term charts as we do. That's a disservice to some readers. To remedy this, we'll look at the developing impulsive move down from the 1478 peaks in the NDX from last week and see what characteristics of the move down help us identify the wave as impulsive rather than corrective.

Take a look at an hourly chart and a 13 minute chart. The first, the hourly chart, shows Demark trend exhaustion indicators. You can see that a valid "9" or "13" trend exhaustion indicator was not registered yet on the NDX, even at today's intraday lows. Hourly charts have a solid tendency to show, at each of the respective wave 1, 2, 3, 4 and 5s, a trend exhaustion indicator. This one does not yet. On the 13 minute chart, you can see a number of important things that help us determine if "5" down from 1478 are complete. (1) the wave count itself, which shows, with one more new low beneath today's intraday low, a "5" wave pattern off the 1478 peak. (2) the momentum profile as measured by MACD: momentum often confirms wave "3" lows but does not confirm wave "5" lows. In this case, short term momentum is likely to diverge on any new intraday low today or tomorrow. (3) Proportionality. As we have labeled it, wave 5 would equal the length of wave 1 if wave 5 ended at 1417 +/- 1 point. Such a wave 5 low would provide nice "proportionality" to the entire impulsive move down from 1478. (4) Stochastics tend, on wave 2 and wave 4 corrective bounces, to reach an "overbought" condition. This 13 minute chart of the NDX shows that to be the case, particularly for the 4th wave peak that just registered this afternoon. All of those factors tend to give us a good idea of whether a "5" wave impulsive move down has taken place.

If it has, we can then come to 2 conclusions: (1) the next degree higher (in this case the hourly chart) trend has turned down and suggest at least another impulsive leg lower of size equal to or larger than the impulsive wave just completed and (2) we could expect an immediate bounce that carries back to some likely Fibonacci target resistance area. For the NDX, if the 5th wave low is put in at 1417 +/- 1 point in the next several trading hours, the analysis suggests a bounce could carry the NDX back to the 38.2%-61.8% retracements of the previous decline, or NDX 1441-1455, with an outside chance at seeing the 78.6% retrace at 1465.

So in order to confirm the bearish case I am then (1) waiting for a confirmed "5" waves down from the 1478 peak and would then look for a corrective (three wave) move back to important Fibonacci resistance levels. At that point the bearish analysis suggests the best risk/reward potential with only a move through the 1479 peak negating this negative view (not meant as advice).
No positions in stocks mentioned.

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