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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.

Today we're focusing on the S&P 500, which has been, among Elliott wave practitioners, a somewhat baffling index to "count" over the last 18 months. One of the difficult aspects of the move off the lows in March 2003 has been the utter lack of impulsiveness in any of the waves that traced out, either up or down. This has been an ongoing thorn in the side of many Elliott wave practitioners because it is the presence of impulsive moves that allow EW analysts to "anchor" their count correctly and to have confidence that the trend they have identified is the correct one at various degrees of scale.

The lack of clearly impulsive waves in the SPX from the March 2003 lows has spawned all manner of highly divergent "counts": some remarkably bullish, some quite bearish. But none of the ones we have seen nor ones that we ourselves have developed have been ideal: they have mostly been compromises between competing counts with a rule stretched here or there in an attempt to assemble a working count of the move off the March 2003 lows and by extension, describe the move off the October 2002 lows and how all of these lows "relate" to the secular bear trend that started in 2000.

The crux of the debate has been thus: at what point in time and price can we reasonably expect the secular bear trend from the 2000-2002 period to re-emerge and adjust the current levels of sentiment, volatility, and valuations to more reasonably historic measures relative to past financial bubble resolution? To this question there have been two primary answers based on what have been "imperfect" Elliott wave counts: (1) the cyclical bullish trend ended in Q1:04 and the secular bearish trend is now underway toward the 2002 lows over the next few years or (2) the bounce off the 2002 lows is tracing out a bullish 5 waves up now that will result in a 6-9 month correction to 950-1050 SPX before another large degree impulsive move up to SPX 1300-1400 in late 2005, early 2006. This second interpretation suffers from many flaws technically (wave form, sentiment, internals, etc.) but perhaps it is most unrealistic because such a large degree bounce (to 1300-1400 SPX ) would be unprecedented in financial history after the bursting of a financial bubble the size of the bubble in equities in 2000. What such a move in the SPX would imply for the DOW (almost certainly new peaks above the 2000 peaks) further diminishes its likelihood. So for those reasons, we believe the SPX Elliott wave count that suggests that there is about to be a "5th" wave up from the October 2002 lows is flawed, and critically so.

However, the first interpretation, that the Q1:04 peaks represented the cyclical bull market peak within a larger secular bear, is now critically flawed as well. Why? Yesterday's print, at SPX 1161.67, eliminates any potential that the SPX saw its C wave peak in March 2004. Therefore the manner in which most Elliott analysts were labeling the move off the March 2003 lows was incorrect as well. The task at hand, then, is to find an Elliot wave count that somehow bridges the large divide between these two competing views of the world. To that end, we believe, in our perusal of the SPX yesterday, that we have come upon an acceptable interpretation of the Elliott wave count off the October 2002 lows that preserves the secular long term bearish trend from the 2000 peaks, but also allows for a new high to be put in above the Q1:04 peaks without there being "5" waves up from the October 2002 lows.

When one views the move up from the March 2003 lows as a series of 3-wave movements, labeled 3-3-3-3-3, both the pattern and the Fibonacci price and time relationships start to form remarkably well. Fibonacci relationships are one of the ways in which Elliott wave analysts help determine if their counts (or labeling) are correct. Elliott waves almost always have one or usually several Fibonacci relationships between the impulsive waves (waves 1, 3, and 5). And in this regard, our new insight into the rise in the SPX from March 2003 has several of these important Fibonacci price and time relationships.

The most important price target that relates all of the important peaks and troughs from the October 2002 lows to now is several points surrounding SPX 1200 (effectively 1195-1205). At this price, wave C (3/03 to present) = 2.618 times wave A (10/02 - 11/02), wave v (8/13/04 to present) = .786 times wave iii (9/30/03 - 3/5/04), and minute wave c (10/25/04 to present) would = 1.618 times minute wave a (Aug 13th 04 to September 21st 04). Further, Fibonacci time relationships (calendar days) are also present in the area between November 12th to November 18th based on the following relationships: wave iii (97 days) = 1.618 times wave i (3/12/03 to 6/17/03), wave v = wave i (97 days) at 11/18/04, and cycle degree wave 1 (2000 peak to 2002 lows at 769 days) would equal cycle degree wave 2 (10/10/02 lows to present) at 11/17/04. There are several other "time" targets in this 11/12/04-11/18/04 window, but suffice it to say that there is a cluster of price and time resistance of major degree around the 1200 area and in the time frame from 11/12 to 11/18.

Why are these price and time relationships important? Because their existence allows us, in the absence of clearly impulsive waves up from the March 2003 lows, to "anchor" the Elliott wave count we are employing and gives us confidence in our labeling. When multiple Fibonacci price and time relationships exist at very different degrees of scale for important peaks and troughs, we can be more confident in the labeling of those peaks and troughs. Indeed, the two other, now-defunct "counts" we described above failed on these Fibonacci relationship grounds. So where those two counts did not show such Fibonacci relationships, our new count does.

All of the previous analysis may indeed be for naught: we simply cannot know for certain if these targets will become reality and usher in the secular bear trend that has been on hold since the 2002 lows. But the existence of so many targets in the SPX 1200 and November 12th to 18th window should at least alert us that they are potential points of bifurcation, points where a trend reversal of major degree may occur. For now, the short term SPX chart remains a mystery. The divergences we talked about over the last week or so never resolved with another sort of real correction. Indeed, ticks, momentum, breadth, and volatility all confirmed the peaks set either yesterday or on Wednesday. In addition, the wave count off the lows set on 10/25 remains highly unorthodox and, as of this writing, we cannot label it sufficiently and thus we can glean no insight from the Elliott wave interpretation in the short term. But given the confirmation of the latest peaks, despite the absence of any sort of real decline yet in the move up from 10/25, our best guess is that the SPX (and DOW for that matter) will remain in its upward trend until we either see our 1200, November 12th-18th target or until we see a clean "5" waves down on the hourly chart that suggests a 3-5 day correction is underway.

With the employment numbers coming out this AM and the election this week, the volatility has been greater than normal, thus causing much confusion in the Elliott wave pattern. We have found at times like these, when none of the technical indicators we employ are providing good risk/reward picture, we simply remain neutral. That said, we are anxiously awaiting evidence that our potential price and time targets of 1200 and November 12th to 18th may be important secular turning points. As those data points present themselves, we'll highlight them here immediately. Stay tuned. Things could get very very interesting over the next few weeks.

No positions in stocks mentioned.

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