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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.

Friday's action did little to clear up the short term picture: though some short term divergences appeared in the price record none were substantial enough to suggest that a large decline might be near. Certainly a 2%+ decline may be imminent (owing to the sub-hourly divergences and the fact that prices are extended given the number of up days) but the major hourly divergences we look for (momentum, breadth, ticks, volatility) are not present. Then again, we would be remiss if we did not note that last week these divergences existed and they did little to cause even a minor pullback in prices (save for the election day 2 hour decline in the afternoon).

At this stage, the daily sentiment extremes that we have been following (MBH commodity advisors, Investors Intelligence, etc.) are as high or higher than each peak in the markets this year. As well, daily Demark indicators for each index registered on Friday with "9"s (in point of fact, the NDX has now registered a "9-13-9" series off the August 13th lows, which is a very rare trend reversal indicator). Those things - sentiment peaks and daily demark trend exhaustion indicators - certainly paint an intermediate term picture that is risky. But our short term work (hourly) has not yet registered the topping indicators (divergences, Demark indicators, etc.) that we like to see to allow us to formulate a good short term view.

As a result of these things, we still believe that the SPX 1200 area and the Fibonacci turn window of 11/12 to 11/18 remain potential magnets for a potentially important intermediate term peak. We will do some work on the NDX this week to determine a possible Fibonacci target for that index but the INDU remains far enough away from its annual peaks (3.4% below) vs the SPX (0.25% above) and NDX (2.2% below) that it may provide an important intramarket divergence (where one index makes a new peak but is unconfirmed by the others). For now the long term risks associated with Demark daily trend exhaustion indicators and the extreme sentiment readings (at least extreme relative to each peak this year) bear watching; they certainly suggest the long side more risky than less (not advice).

Having said that though, the short term does not yet provide us with a good risk/reward view here owing to the fact that the recent peaks were largely confirmed by short term measures of momentum, breadth, ticks, etc. Only once we see a meaningful divergence on this indicators again can we feel comfortable selling strength. In the meantime however, playing the long side is not without its risks either since some very short term (13 min charts) divergences are apparent.

As a result of all of these conditions we remain decidedly on the sideline awaiting the next good risk/reward setup either from the long side (with a decline that sets up bullish hourly divergences) or the short side (in our Fibonacci tie and price window for the SPX (1200 and 11/12-11/18)) we will look to take action then. For now patience is key.

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