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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 strong move upward, coupled with its pattern and internals (momentum, breadth, ticks, volume, etc.) presents two viable alternatives in terms of the Elliott wave pattern for the markets here. Specifically, those are (1) a rise above the late December, early January peaks or (2) a failure below them at some Fibonacci resistance of the recent January decline. And those two options are not mutually exclusive: it is entirely reasonable, based on the current patterns and the relative distances to Fibonacci resistances, that each market could well do different things.

The SPX could make a new high while the INDU, NDX, and RTY do not or the SPX and INDU could make slight new highs while the NDX and RTY do not. Such intramarket divergences are indeed common at large degree tops, which we still confidently believe is what is being traced out here. Despite the move above the critical levels we highlighted all last week, this entire move up from the lows in August is a final impulse wave. This means the probability remains strong that the long term trend is ending 'around here' and that prices could turn down meaningfully once this impulse wave up from the August lows completes (not advice). Calling some high confidence degree peak becomes a matter of determining when the final "5" waves up (from the August lows for the NDX, RTY, and SPX and the September lows for the INDU). And on that score, the indices have differing patterns that result in potentially different peak dynamics.

Specifically momentum, breadth, and volatility are confirming this latest peak in the blue chips; the same cannot be said for the Nasdaq indices. And that dichotomy - between the blue chips and the Nasdaq, raises a larger point that we think is important to make here and that is the relative action of the indices. At very important (large degree) peaks and troughs, markets do not act uniformly. Which is to say that some make new extremes while others lag; we often refer to these as intra-market divergences. And far from being benign, such action is often testimony to a fractured - and thus technically weak - market. Yes, you could argue that one index is simply lagging and will "catch up" to the others. That is possible. Such was the case with the INDU in the August/September time frame when the SPX, NDX, and RTY found their low in August while the Dow found its low in September (along with the SOX). But the wave pattern helps us determine which is the more likely probability: lagging or leading. In 2000, the markets were not uniform: the SPX, RTY and NDX peaked in March while the INDU in January. And in Q1/Q2 of 2004, the INDU peaked in February, the NDX in January, the SPX in March, and the RTY in April. Our current analysis of the wave pattern off the August lows suggest that the SPX has a good probability of making a new peak, the INDU a 50/50 chance and the NDX a slim chance. Thus it would be entirely fitting (and confirming) of a larger degree top if such a scenario played out: the NDX did not make a new high while the SPX and/or the INDU did.

Let's turn then to the short term. The SPX has two targets: either it turns down from the 1203-1207 area or it reaches to its next Fibonacci projection at 1233/35 in a new (5th wave) peak over the next several weeks before we can expect a larger degree decline. One can make a good case that "5" waves up on the hourly chart from the lows on the 24th (and/or 28th) are complete (along with hourly DeMarks and a short term momentum divergence). If so, a pullback to the 1179 to 1188 area is expected under the bullish interpretation. The 1178 area will fail to hold prices if the more bearish interpretation is operative. "How" the SPX pulls back from any near term peak will be very important technical information: a deep impulsive pullback that takes out 1178 and then 1171 makes the more bearish interpretation operative. A shallow corrective looking pullback to the 1184/88 area will setup a potential move higher based on the aggressive interpretation to scalp the last 40 to 50 SPX points. Until then neither the long side or short side are presenting good risk/reward entries here.

The INDU is the least clear of the three indices; it is possible but not probable that the INDU makes a new annual high and that conclusion is based entirely on the fact that the INDU's pattern off the September lows looks like a completed "5" wave impulsive move. The situation is the same in this index: a shallow corrective decline in the next few days that holds 10520-10600 would paint a near term bullish picture and suggest an attempt at the recent swing peaks and perhaps a new annual high. If a move down is impulsive and takes out support at 10480 that would strongly reinvigorate the bearish case.

For its part the NDX is the most bearish of the indices, having bounced from its lows on the 24th in an overlapping and corrective manner. We have written about the open gap in the NDX from Jan 19th (at 1546). It remains a magnet for the NDX should prices continue to sub divide higher. But the pattern and the demarks on a daily and hourly basis suggest that the NDX has a much more difficult path ahead of it to make new annual highs. We think it is a slim probability that it does. In the short term then, the NDX could continue to correctively chop higher (toward that 1546 gap) if the SPX makes its way toward 1233/35. But like the SPX and INDU, if the NDX starts down soon (it too can be claimed to be near a very important resistance point) and takes out 1500, that would strongly argue that the more bearish interpretation (of an immediate turn down in the NDX) is operative.

For now then, no clear view is evident for the SPX and INDU as our prior scenario got stopped out by the peaks of the 19th. The bearish case for the NDX is still viable with the 19th as stops but we would not be adding to the NDX here until we get a better sense of what the SPX and INDU are up to (not advice). While we don't think the NDX will make a new peak, we need to be respectful of levels.

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