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Advanced Technical Analysis



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.

Only a small change to our index conclusions here. We're still looking for potentially important peak (certainly in the short term and perhaps on a long term basis) to be registered here in all three indices. However, last week we had suggested that a 'down-up' sequence (down 1-2% then up to SPX 1200) could complete "5" waves off the October 25th lows for each index. Given the price action of the last few days, it is equally possible that the "down" part of that down-up sequence from last week's peaks was simply a "sideways" consolidation that served the same purpose: providing an internal pause before putting in a final 5th wave up from the October 25th lows.

So at this stage there remain two possibilities: (1) a final 5th wave up from the 10/25 lows is now underway (and it started last Wednesday 11/10) or (2) we'll still see a "down-up" sequence from current prices that will then register a meaningful peak. In either case, both of the above possibilities adhere to our analysis from November 5th: that a potentially long term meaningful peak in the S&P could take place between November 12th and November 18th around the SPX 1200 area (+/-5pts).

The size of any correction from this peak will be key to the entire secular bear market or cyclical bull market analysis: an impulsive, momentum driven pullback that takes out important lower Fibonacci support will bolster our analysis for the re-start of the secular bearish trend. A shallow overlapping pullback that holds important Fibonacci support (SPX 1140-1160) will bolster the idea that there is yet more price advance to come and that at least the next price resistance level will be hit (SPX 1250 +/-) if not more.

However, we want to keep you abreast of the forest, as you get enough info about the trees from the sell-side. Specifically, sentiment. AAII bulls vs. bears, at 63.8% bulls and 22.8% bears, is at the same level or higher (on both absolute terms and difference between bulls and bears terms) than the major peaks registered each time this year in the SPX. MBH commodity advisors (traders, short term read) registers 83.3% bulls, a figure only equaled or exceeded in February 20th 2004, January 27th 2004, and August 31 1993 in its 17 year history. Market Vane's bullish consensus too, remains at the highest level in 6 years at 72%; this is greater than the bullishness when stocks were reaching their bubble peaks in 2000 for all three indices. To these shorter term sentiment readings we would add those that we highlighted in our piece on the SPX several weeks ago (dated 11/5/04) in which we noted the existence of more than 105 straight weeks where bulls have outnumbered bears in several sentiment indicators, more than double the number of straight weeks of bulls outnumbering bears leading up to the peaks in 2000.

To this bullish backdrop, a significant overbought extreme exists: the 5 day relative strength index for the DOW is at 94.5, a level last seen in November 1996. 10 day TRIN is as overbought as it has been all this year and price action Friday and today (so far) is manifestly not confirming these new peaks: momentum, breadth, ticks, and volatility are each diverging here in the short term.

Whether the markets experience a "down-up" sequence from current prices or continue to chop higher into our SPX 1200 (+/- 5 pts) and November 12th- November 18th time window is moot to the intermediate term analysis: it is how this entire trend up from October 25th corrects that will ultimately determine just how important this SPX Fibonacci price and time target is. A deep impulsive decline that takes out 1120 will suggest the possible emergence of the bearish secular trend from 2000. A shallow, overlapping correction that largely holds 1140-1160 area will suggest more peaks toward SPX 1250 at least into the first month or two of 2005.

The aggressive interpretation then looking for technical weakness at these levels may make sense given all the short term divergences. The more conservative approach, favors waiting for a clear "5" wave move down on the hourly chart setting up the bearish case off of the subsequent Fibonacci bounce.

Is it possible that some sort of very strong third wave up has started from the October 25th lows and that such short term divergences and sentiment and overbought extremes won't provide corrections? Yes. But such events are rare in recorded price history. And they are extremely rare in the price history of a secular bear market. Sometimes traders can make money betting with the crowd and being part of the either overwhelmingly bullish or overwhelmingly bearish consensus, but it is a position that carries lots of risks. And an appreciation of that risk is essential at this juncture. We hope this note at least provides an appreciation of that risk.

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