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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.

Like the SPX and INDU, the RTY has bounced both further and longer than the technicals suggested it might in our last note (dated 1/26). And like the SPX too, it is possible that the RTY could need one more peak in the 656-665 area to complete the entire five wave impulsive move off its August lows and thus the entire 5 wave move off the 2002 lows for this index. Make no mistake, we remain steadfastly bearish the RTY in the longer term; the question before us becomes whether or not the RTY is going to see one more slight new peak above the 656 peak registered on 12/31 or if prices will fail at some Fibonacci resistance of the decline from 12/31 to the lows on 1/12.

The dividing line for that determination becomes what happens at current prices: 636 is the 61.8% retrace of the decline from 12/31 to 1/12 while 645 is the 78.6% retrace of the same decline. Any move materially above this important resistance point 'points' to higher Fibonacci resistance in the 658-665 area for this index, though any price action above the 12/31 peak could 'satisfy' the need for a 5th wave peak off the August 04 lows for the RTY. Interestingly, the bounce off the lows on the 12th counts well as an ABC zigzag, with the A wave advancing from 1/12 to the peaks on the 18th, the B wave from the 1/18 peak to the 1/24 lows, and the (potentially final) C wave from the 24th to now. In order to determine completion of this C wave, we need to count "5" waves off the lows of the 24th.

From our perspective, we can 'see' the need for one more move up sequence that carries to wave 1=wave 5 equality at RTY 645 +/- 1pt. This also happens to be the 78.6% retrace point for the entire move down from 12/31 to the 1/12 lows. So this cluster of resistance, between yesterday's peak at 640 and the important 645 resistance point, remain key lines in the sand from which the RTY needs to reverse to maintain the count we currently have which calls for a swift decline toward new lows for the RTY. Otherwise, should the RTY either exceed the 645 level and/or find support in the 620-630 area over the next several days and bounce hard, we should then expect the RTY to make a new annual peak above the peaks registered on 12/31 at 656.

Fibonacci projections start at 658 (IWM $130.80) and proceed to 665 (IWM $132.50) but in reality any new peak above the 12/31 peaks would put in place the minimum necessary waves from both the August low 2004 lows as well as the October 2002 lows and thus lead to the largest correction in the RTY seen in more than 2 years.

The analysis then favors positioning for weakness from one more peak to 640 / 645 (IWM 127.50 to 128.50) with trade moving through 648 ($129.50) forcing us to the side (not advice). If these stops are elected we will simply bide time and wait for upper Fibonacci resistances to be met and look to position for weakness in this index again. Given the downside, such in and out trading should be worth the cost of entering into this potentially lucrative position for 2005. We remain confident in the longer term bearish interpretation of the RTY.

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No positions in stocks mentioned.

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