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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 price action, a spike up in the AM followed by a move lower throughout the day, produced no significant technical data in and of itself but certainly added two key elements to the aggregate picture: (1) hourly divergences (in breadth, momentum, volatility, and ticks) became more intense and (2) daily DeMark "13" trend exhaustion indicators registered in both the S&P futures and the NDX cash markets. We don't need to reiterate the sentiment backdrop: 10 day average of daily sentiment (MBH commodity advisors) is at an all time peak in the 17 year history of the survey while the Investors Intelligence and AAII bull/bear surveys remain at all time peaks as well. Clearly then the conditions are present for at least a multi-week peak if not something potentially much more bearish.

As our original SPX weekly note on 11/5/04 suggested, whether a peak is registered in the 1195-1205 now or in the 1250-1260 area in January/February, we can fully expect, given the weight of the Demark indicators, the sentiment backdrop, the Elliott wave count, and the Fibonacci relationships from the 2002 low (not to mention the presidential cycle and stock price relationships after a Fed tightening cycle has begun), a substantial correction once this current leg up from the August 13th lows completes. The only question for us is if this correction starts now and from these prices or later and from slightly higher prices. Think about it for a minute: if we were to tell you in the Summer and Fall of 2002, when the Dow was routinely losing 200-300 points per day, that sentiment would reverse and then become extreme enough to surpass the all-time peaks seen at the peak of the bubble in 2000 (even though prices remain meaningfully below that peak), you would have certainly questioned our sanity. Alas, that is exactly where we find ourselves today: a mere 2 years and 2 months later, the crowd has become more bullish than ever. Pressing the upside in such an environment - just as getting long in 2000 - is remarkably risky in our view. But the short side, just like the short side through most of 2000, has been frustrating as well and until we see a decided (read: impulsive) decline from either this SPX 1195-1205 level or the 1250-1260 area, we cannot with confidence say that some sort of real correction is underway. For now I remain on the sidelines: it is possible that the indices put in a good peak on Friday but we've been saying that for the last two weeks.

Until we get an impulsive decline that breaks lower support, the indices can continue to meander chaotically higher. Prudence suggests giving the bulls enough rope here. When they exhaust their ammunition, and it's a near certainty they will given the all-time record sentiment extreme, I will be ready to take a position. For now, being patient and watching the market action at this historic juncture in asset markets will be the most profitable strategy, in my opinion.

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No positions in stocks mentioned.

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