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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.

Yesterday's price action in all three indices counts best as the start of an impulsive decline: though NYSE volume only picked up moderately, down volume swamped up volume 4.9 to 1, a figure last exceeded on September 22nd; hourly momentum was the most negative in at least 30 days, negative ticks confirmed the negative momentum, and finally breadth, at -1743 shares net, a figure exceeded last July 21st, which took place in the middle of an 8% SPX decline into August 13th. Nasdaq figures for all of the above (volume, breadth, ticks, and momentum) were far more excessive: volume, at 2.68B shares, was last exceeded on June 6th 2003; breadth (at -1568 net shares) was last this negative on August 6th, 7 days before the end of a multi month slide to the August 13th lows, and again momentum was as negative as it has been in at least 31 days.

To this anecdotal data we would add the following: yesterday was a down 1.3% day for the SPX, a % down day not seen since October 19th, six days before the end of a 20 day slide in the SPX. The only other session with as large a percent decline since the August 13th lows was September 22nd, which itself was part of a 7 day correction in the SPX which carried lower for 4 more days.

The point is that such large down days are (1) uncommon and (2) have not portended the immediate end of even a corrective decline. Given the conditional elements (sentiment, wave form, DeMark indicators, etc.) I think yesterday's slide has a good potential to carry further lower toward the Fibonacci support region of at least SPX 1150-1160 (not advice). As I have been writing for the last two weeks: it is the form of the decline that will help me understand if the peak recently registered in all three indices is a very important peak or is simply a waypoint in the trip to SPX 1250-1260 (and commensurately higher in the INDU and NDX).

For now, I think the best interpretation appears to be a continued decline toward those lower important supports: SPX 1150-1160, INDU 10250-10350, and NDX 1530-1550. Frankly, given the multiple potential interpretations of the wave pattern off the 10/25 lows in each index, it is difficult to know if the decline that started yesterday is (1) the re-start of a much larger bearish trend (as would be implied by the all-time record sentiment extremes), (2) the beginning stages of a deeper pullback toward lower Fibonacci support before another assault on new peaks in Q1:05, or (3) it is a shallow correction nearing the end of a larger mostly sideways move that started on November 17th.

For this reason, it may be prudent for conservative traders to stay on the sidelines until we get more confirmation via the price pattern that one of those three options is operative (not advice). The more aggressive interpretation for participating in this decline, calls for weakness from any bounces, looking for a move to those cited lower supports. Trade powering thru yesterday's peaks would negate the bearish near-term call and force us to stand aside.

Please recall the note we made on Monday that the NDX cash and the SPX futures both registered DeMark "13" trend exhaustion indicators on Friday's close: to this we would add that both of those indices have now registered DeMark "price flips" to the downside suggesting that a potential new downtrend may be in the process of forming. Like the Elliott wave pattern, we cannot know for sure until we see some more technical data points but given the confluence of sentiment, Fibonacci price projections (see our 11/5/04 note on the SPX), divergences (volatility, momentum, breadth, and ticks) and DeMark indicators, it is reasonable to conclude that a potentially large downside move is possible. Stay tuned; things should get pretty interesting over the next week or two.

No positions in stocks mentioned.

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