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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.

The last two days of trading have produced little price movement but have produced some interesting short term technical data: blue chip (NYSE) divergences in breadth, momentum, ticks, and volatility have all registered at yesterday's peaks for the SPX and INDU. And ever more telling, the NDX continues to have a far different (and more bearish) pattern; those divergences mentioned above for the blue chips were even more marked for the Nasdaq indices.

There remain a number of different interpretations of the short term price action in terms of the acceptable Elliott wave pattern; none of the analyses change what we are looking for from Monday's note: "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 likely 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 for the last 40 to 50 SPX points.

Until then neither the long side nor short side are presenting good risk/reward scenario here. The 1203-1207 'area' remains a key focus for now. It is possible that one more small down-up sequence is needed to complete a "5" wave move off the lows from January 24th but the short term pattern remains unclear on this point. Suffice it to say that these finer points are moot anyway: above 1210 'points' to an eventual new peak with targets in the SPX 1233/35 area. What the INDU does in this latter scenario is a coin toss.

The NDX cash still has that open gap from Jan 19th (at 1546) while the NDX futures have already closed that gap. And in terms of pattern, an ABC-X-ABC double zigzag may be the pattern that is forming here. If so either the NDX completed that corrective pattern yesterday or it too will do so with one more down-up sequence from yesterday's peaks (but again such a final down-up sequence is not necessary given the clear divergences for the Nasdaq indices).

We would note that the SOX itself seems to have completed its correction off the lows from the 24th so we should add that piece of bearish data to the overall mix. The trading strategy remains the same: nothing to do until we see "how the SPX (and INDU) turns down from around these levels; a shallow corrective move that finds support in the 1180/88 area will set up an aggressive upside move to SPX 1235. Taking out 1178 and 1171 would strongly reinforce the bearish call. The NDX call remains the same too; patience until we see a clear trend change down.

No positions in stocks mentioned.

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