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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.

Yesterday prices bounced in what looks like a 5th wave of a 5th wave off the lows from the 24th, potentially completing all the necessary pieces for at least a week-long move down if not something much more bearish. As our last note said, we saw three possibilities for short term action: "(1) That one more slight new high this AM produces a full "5" minor waves off the lows form the 24th (producing wave i) and then declines to SPX 1181-1191 over the next 5-8 sessions (producing wave ii) before bouncing from that Fibonacci support and moving towards our higher target of 1233/35 (producing waves iii, iv, and v) into March where a major degree peak could form. (2) That the move off the Jan 24th lows is more 'mature' from a wave count than it looks and that prices are already within a wave iii off the 24th lows, implying a steady progression toward the 1233/35 area over the next 1-2 weeks where a major degree peak could form. Or (3) That the move off the lows on the 24th is in fact tracing out what could be a truncated 5th wave of an ending diagonal triangle that started in August. Such a move is expected to NOT register new peaks above SPX 1217 and should trace out a "3" wave move off the lows from the 24th. Under this interpretation, one more slight new high above Friday's prices could complete the entire advance off the lows from the 24th, the lows from August 13th, and the lows from March 2003, ushering in a major bear market move for the remainder of 2005."

Each of those remain possibilities today, the deciding factor will be how prices likely decline from current levels. Yesterday's peaks created clear divergences in all 4 of the measures we watch to give us more or less confidence in our wave count and DeMark indicators: momentum, breadth, ticks, and volatility are diverged yesterday meaningfully. And when coupled with a complete "5" waves off the lows of Jan 24th and the presence of hourly DeMark trend exhaustion indicators, our confidence rating in at least a near term, week long decline to SPX 1182-1191 is now 'high'.

Recall that much depends on 'how' prices decline into this Fibonacci support zone. By correctively moving into it and laboring lower, this will signal that new annual peaks in the DOW and SPX are necessary, perhaps toward SPX 1234 in March. But if those lower supports do not hold and prices decline impulsively from either yesterday's peaks or today's, then that will suggest the entire bull move off the lows from 2002 has ended in a truncation and is complete, ushering in the next phase of the big bear market that started in 2000. And on this point, again, we want to be expressly clear, because you are not going to read or hear this from other sources: we are expecting a major peak to be registered soon in all indices and a major bear market decline to begin very soon (not advice). No one on the sell-side is saying this because the fundamentals do not portend this; the economy does not suggest this. And those are precisely what makes this a strong possibility. Stocks lead those measures, as they have at every important turn this century. So find no comfort or solace in the fact that things aren't 'so bad' in the economy.

It isn't the economy you should be watching, it's the stock market. And right now, the stock market indicators we have developed are saying some very bearish things. The aggressive interpretation suggests weakness from today's open and/or any new peak in all three indices. We are expecting at least a week-long decline of 150-300 basis points at least. And if those lower supports do not hold then something potentially much more bearish could be afoot. The analysis suggests tight risk management in case prices want to head directly to the upper Fibonacci target we ID'd: SPX 1234 or so. Trade moving through SPX 1216, INDU 10870, and NDX 1569 would force us to stand aside.

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