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Advanced Technical Analysis

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Editors Note: Due to technical difficulties (Collins) - Scott's column did not appear this morning and with apologies here it is.

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.

The strength (price action, wave form, internals) the markets exhibited on Friday carried through to a Monday early AM peak and has since dissipated, as Monday's peak came on short term divergences in breadth, ticks, volatility, and momentum (13 min charts and smaller).

The most important observation we can make, at least for the SPX and NDX, is that the form of the price decline from Monday's peak is so far (so far being the key word here) corrective. That is to say that there is both overlap and several "3" wave moves down. This suggests that a move to new highs above Monday's highs remains the likely short term view. Should such a new peak come in the next few sessions, undoubtedly that would generate the all-important (but not entirely necessary) hourly divergences we look for to indicate a peak in prices.

For now then, our conclusions from Monday's AM note remain valid: our confidence in the bullish or bearish analysis (on a multi-week trend basis that is) remains low and slight new price highs in the SPX and NDX could be expected in the short term. Important Fibonacci resistances reside at SPX 1146/47 and NDX 1475-1480 and, should we get to them, would be the next potentially solid area for a bearish turn if we get the hourly divergences we look for in breadth, ticks, volatility (see our note yesterday on the VXO), and momentum (not advice).

Parenthetically, we would note that some potentially important Demark trend exhaustion signals have/will register this week in the NDX and SPX. Specifically, the SPX registered a daily "13" sell signal on Monday with a risk (implied stop) level of 1149 (i.e. a close above that would invalidate this "13" sell signal) and the NDX will likely register a "13" in today's or tomorrow's session if it can close or open higher than 1456.19.

As we noted in Monday's AM note, there are several acceptable ways to "count" the price action off the August lows for both the NDX and SPX; some of them are bullish to slight new annual highs, others are bearish and suggest this move up will fail before making new highs. For their part, we have more confidence in the bearish educational analysis for the SPX and INDU than we do the bullish. Conversely, we have little confidence in either the bullish or bearish interpretation for the NDX at this particular price juncture. For the Nasdaq 100 then, we'll simply have to wait for the market to provide enough evidence for a trend one way or another.

In sum then, we have three technical tools that we routinely employ to help us determine important support and resistance points and determine the probability that important trend inflection points are near: Elliott wave counts, Demark trend exhaustion indicators, and traditional momentum measures. (1) The current Elliott wave count for the SPX and NDX call for a slight new peak above Monday's highs toward 1146/47 and NDX 1475/80 where the pattern could potentially run into major resistance and turn down. The size and scope of the turn down from those resistance areas we cannot have high confidence in: it could be the start of a major bear trend or it may also be simply a few days correction back to 1118-1128 and 1420-1440. (2) Several important daily Demark trend exhaustion indicators are/will be present that could act as important termination points for this move off the August lows. And (3) traditional momentum measures do not yet show hourly divergences that usually (but not always) accompany important peaks.

Net/net then, I'll stay on the sidelines until I get a better handle on the Elliott wave count and wait for hourly momentum divergences to signal a potentially important peak. Given the relative weakness in the INDU (and the fact that it has not yet even produced a new peak above the 9/13 peaks), the overall market feels very much like it did at the Q1:04 peaks, with some markets making new highs while others remain mired below resistance. Until the situation clarifies itself, I'll prefer to watch and wait.

No positions in stocks mentioned.

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