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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.

There is very little to add to last week's index update in which we stated that, given the extreme sentiment backdrop and the hourly divergences that had accumulated, a trend change of some degree was probable. We had said at the time that the pattern of any decline would tell us much about just what degree of trend we are likely to see to "resolve" these sentiment extremes and hourly divergences present in the price pattern. A clearly corrective, overlapping 3 wave decline would strongly suggest an eventual move to SPX 1250/1260 in Q1:05 while an impulsive, 5 wave decline from current levels would argue for a larger degree correction and even possibly the renewal of the 2000-2002 secular bear market. As of now, we still do not have enough price and technical information to determine if a decline is simply corrective or is in fact impulsive (so far).

The move down from last week's peaks can be interpreted in multiple acceptable ways. Until more price pattern develops and we see more technical evidence, we cannot be certain of what the larger trend is from current prices. Friday witnessed a new peak in the NDX (unconfirmed by the Nasdaq Composite, the SPX, nor the INDU) which does not alter our analysis for at least a sideways pause or a clear correction being imminent. Once again we find ourselves waiting to see what 'form' any sideways consolidation or downward correction takes before becoming confident in making a longer term (multi-week) trend analysis here.

For now, we still think the lower levels we mentioned in last week's note are good: SPX 1151, INDU 10250-300, and NDX 1520-1540 over the next 1-2 weeks. However, since the short term pattern remains unclear, we cannot say with confidence if those prices will indeed materialize. Therefore, we await some short term technical evidence that will allow us to confidently state those are minimum lower targets for a correction based on the analysis. Certainly, given the bullish sentiment extremes, the long side is a very crowded and risky place to be. That said, the short side too remains risky until we get some short term technical clues that suggest the minimum lower targets for the indices are highly probable.

The aggressive interpretation failed to play out from last week (looking for weakness off of any bounces with trade moving thru SPX 1189, INDU 10603 and NDX 1582 negating that bearish view); the NDX stop was elected Friday afternoon and the short term remains muddled enough to suggest waiting for a better setup (not advice). Hopefully this week will clear up the short term and thus allow us to make a more confident view on the longer term (multi-week) trend.

No positions in stocks mentioned.

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