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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.

Prices and internals (hourly momentum, ticks, breadth, volatility) surged higher on Friday, eclipsing important Fibonacci price resistance points for both the SPX and NDX but not doing so in the relatively weaker INDU index. At this point this action is a tale of three markets, as the NDX, in its Elliott wave count, its Demark indicators, and its hourly and daily momentum profile, remains the strongest index by far. The SPX is second and the INDU a distant third on all of those important technical indicators.

Though each of the three big indices has both a bullish and bearish interpretation that can be gleaned from the technicals they have exhibited, what makes this overall market feel very much like the January to March 2004 period is the fact that in some cases the bullish interpretation is the more probable (the NDX) and in others the bearish is more probable (the INDU), with the SPX a wash between the two. With that in mind, let's analyze each market on its own merits.

First, the NDX showed both the largest gap up and the best internals (breadth, ticks, etc.) and easily exceeded the 9/21 peaks. The bearish interpretation of the Elliott wave pattern is that, as the Friday note suggested, a double zigzag is underway that could carry the index to the 1460-1475 area (with a tight cluster of Fibonacci resistance in the 1463-1467) in the next several sessions before likely succumbing to the larger bearish trend and potentially falling hard.

The bullish interpretation suggests that the NDX is in the start of a third wave of an impulse up from the 8/13 lows that would imply new annual highs with only minor corrections over the next few weeks as this index plows higher. A daily Demark trend exhaustion indicator could register this week but it is unclear how that, as this early stage, would "play into" the existing Elliott wave count. Either way, Friday's strong internals suggest that, in the least, its momentum would need several days before petering out even if the larger degree trend is down.

For the INDU, the 9/21 peaks were not exceeded but 28/30 INDU stocks were up on the day and its internal momentum was strong. As of Friday's close, a clear "3" wave move off the 9/28 lows could be complete; if so, it would be a corrective bounce and reinforce the idea that the bearish interpretation is the correct one for this index. A move back below 10030 would reinforce the bearish interpretation and point to much lower numbers immediately.

The SPX is a mix of the INDU and the NDX: strong internals on Friday and slightly eclipsing the 9/21 peaks but with overlap of the price pattern over the last few weeks, suggestive of either a very weak impulse or indeed a corrective bounce. Even if the bearish interpretation is the right one, a few days of "working off" this strong momentum would be necessary before the bear trend kicks back in. The bullish interpretation, as per the NDX, would be for new annual highs in the next few months.

The overall technical picture is an amalgam of contradictory signals: (1) with the eclipse of the 9/21 peaks, there are now several valid Elliott wave interpretations for the NDX and SPX that we must consider. Some of these Elliott wave "counts" maintain the bearish bias we have had for the last 2 weeks, and others paint a far more bullish picture (we would say that the bulls have the bias 60/40 for now). Meanwhile the INDU can still be mostly considered bearish. (2) Daily Demark trend exhaustion "13" signals could register this week for the NDX and SPX (potentially bearish) BUT (3) the hourly momentum/ticks/breadth profile is strong enough that an imminent peak isn't expected even if the bearish trend is the right one. All of these technical cross currents force both a "low" confidence rating and a distinctly "sidelines" approach to analyzing this market.

The short term and intermediate term count is open to enough highly divergent technical conclusions that we simply cannot provide good risk/reward analysis. Coming under SPX 1115, NDX 1404, and INDU 10030 would be highly bearish. As long as these levels hold, the bearish interpretation calls for at least a few more days of sluggish advance to "work" off the momentum generated on Friday. If the bullish interpretation is operative, continued strong advances with great internals would be the expected action.

At this stage it is important to remind readers that the "big picture" technicals (weekly sentiment, Elliott wave pattern, Fibonacci projections, and Demark indicators) remain strongly on the side of the bears. This suggests that the entire move off the October 2002 lows was a bear market correction and that new lows beneath those 2002 lows will eventually be seen. But, as regular readers are already aware, "corrective" bounces are manifestly the most difficult to interpret as they are underway, as they can take a clearly corrective "form" but keep "extending" to higher and higher Fibonacci resistance levels.

Case in point: at the Q1:04 peaks, the INDU had retraced fully78.6% of its bear market 2000-2002 decline, the SPX 50% of its decline and the NDX roughly 25% of its decline. Which Fibonacci retracements level acts as the terminal resistance point for each market is difficult to say with high confidence until a clear "5" wave decline ensues on the daily chart; this is specifically why we maintain such tight levels, as the next Fibonacci resistance level can always act as a magnet for prices.

In the present case, though we remain confident that the move off the 2002 lows is corrective (and thus will be entirely retraced in time) we cannot be highly confident that such a decline is starting now. At best it is several sessions away. Further we must be respectful of the possibility to that even higher Fibonacci resistance levels could be seen before the dominant bear trend exerts itself. With 101 straight weeks with a bullish consensus (Investors Intelligence), more than double the number of straight weeks of bullishness in 2000, with the VXO at an 8 year low, with the INDU and Transports diverging (Dow Theory sell signal), and with mutual fund cash levels at 4.3% (vs the 4.1% all-time low in 2000), one would be hard pressed to make the case that stocks are either unloved or cheap by any long term measure. When combined with the most probable Elliott wave count off the 2002 low (and ABC zigzag directly to key Fibonacci resistances), being aggressively long at these levels for anything but the most speculative scalp is risky business, in my opinion (not advice).

No positions in stocks mentioned.

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