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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 dropped impulsively on Friday after putting in a peak (SPX, INDU, CCMP - Nasdaq Composite) on Wednesday November 17th while the NDX peaked on November 18th before starting an impulsive decline into Friday's close. Each market closed near the lows of the day and did so with the strongest momentum since the late October declines. Last week's SPX peaks occurred 50 basis points lower than our stated 1195-1205 band (11/5/04 note) but did come on 11/17 which was within the 11/12-11/18 time target we cited and precisely to the day of one of the longer term Fibonacci time targets we mentioned. So what now? Let's review.

Last week we wrote less frequently than we normally do, owing to the fact that there was simply little left to say that we had not covered in technical notes starting on November 5th and ending with last Tuesday's piece (11/16/04). In those notes, we covered some important aspects of the technical picture: (1) the presence of both all-time and near all-time record sentiment extremes (Daily sentiment index, AAII, Investor's Intelligence, etc.); (2) the intramarket divergences (the SPX and NDX made new annual highs while the INDU and CCMP did not); (3) the presence of important Fibonacci price and time targets for the SPX of 1195-1205 and November 12th-November 18th (with 11/17 and 11/18 specifically targeted by long term Fibonacci time relationships); (4) the presence of important divergences in momentum, breadth, ticks, and volatility (please note that the VXO has still not declined below its 10/1/04 lows); (5) the presence of daily Demark trend exhaustion indicators, and; (6) the potential for a complete or nearly complete wave structure from the 10/25 lows, the 8/13 lows, the March 2003 lows and the October 2002 lows.

To add two more data points to those observations above, we would note the following. First, that at last week's peaks, the NDX tested its 38.2% Fibonacci retracement point (log scale) of the entire decline from 2000 to 2002, the OEX tested its Fibonacci 50% retracement point, and the SPX tested its 61.8% retracement point (again all log scale). The second observation we would add is sentiment-related. We would note that the 10 day moving average of Daily Sentiment (MBH commodity advisors) for the SPX stood at 89.3% on Thursday, exceeding all such measures of bullish sentiment for the last 17 years. Think about that for a moment, because it is important to let that sink in. Since 1987 the 10 day average of the Daily Sentiment Index has never exceeded Thursday's peaks, despite the fact that prices rose parabolically from 1994 to the 2000 peaks, generating enormous paper wealth along the way and ushering in all-time records in bullishness. In all of that time, with SPX prices rising non-linearly through much of the late 1990s, investors never waxed as bullish as they are now.

Sentiment however, in and of itself, can be misleading; in some cases remarkably so. Optimism can be self-reinforcing; herding behavior can produce yet more bullishness even when that bullishness is already at an extreme. This is why there was so little to add last week: all the right conditions were in place for a turn down of some degree: sentiment extremes, divergences (momentum, breadth, ticks, and volatility), Daily Demark indicators, important Fibonacci price and time targets near, and a potentially completed short term, intermediate term, and long term Elliott wave structure. But only price itself matters; and only price can suggest that some degree of trend has come to a conclusion.

With the price decline from last week's peaks, we can tentatively conclude that a resolution of the above sentiment, divergence, Demark, Fibonacci price/time targets, and Elliott wave completion is underway. The question for traders and investors however is this: to what degree?

Is this merely a decline to correct the move up from the 10/25 lows? A decline to correct the advance from the August 13th (SPX and NDX) lows? A decline to correct the advance off the March 2004 lows? The October 2002 lows? These are the most important questions we can ask. Unfortunately we simply do not have sufficient technical data yet to be confident in a conclusion to all 4 of those questions. We can however, make some important observations.

Specifically, by following our technical guides, we can confidently offer that the current correction underway is a decline that could at least correct the advance off the 10/25 lows. From those lows, the INDU climbed 9.2%, the SPX +9.0%, and the NDX 11.1%. A minimum decline we could expect if the market is simply correcting the advance off the 10/25 lows would be the Fibonacci 38.2% retrace of the October 25th to November 17th peaks. In that case, we could expect (via the indicators--not advice) at a minimum to see SPX 1151, INDU 10261, and NDX 1521 over the next 9-15 days. If prices push through these levels, Fibonacci support exists at lower levels as well: SPX 1140, INDU 10155, and NDX 1500.

But the key to understanding what degree of decline is developing will really be told with the form in which prices decline (impulsive or corrective) into those minimum targets. If prices decline impulsively (i.e. in "5" waves) and maintain that impulsiveness while breaking below key supports (SPX 1120, INDU 1000, and NDX 1460), then we can then argue that something more bearish than simply a correction of the bounce from the 10/25 lows is afoot. At this stage we can only be confident that prices are currently declining in a correction off the move up from the 10/25 lows. Continued impulsive declines and moves below key Fibonacci supports will suggest a more bearish stance is warranted. For now then, we will remain agnostic as to what degree (short term, intermediate term, long term) decline is taking place. I will be keeping my time frame short and my trades tight as that will be the best way to limit the risk of being on the wrong side of the major trend until we get enough evidence (form and price decline) that the peaks at 11/17 were of large degree.

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