Note: the following is an educational analysis of technical indicators and is not meant as advice.
S&P 500 (SPX)
• To recap my current view (for purposes of education): the current SPX Elliott wave count, in conjunction with our Demark and momentum indicators, suggests that, at least the five-wave advance from the late October 24th low of 1018 is complete, suggesting an "ABC" corrective move down to the 1109-1115 area before a trade-able bounce can be expected. We can already count a full 5 wave impulsive move down from the 1163 high, suggesting that wave "A" of the expected ABC down move might be nearing completion. Where that first "five down" impulse wave finds a low will go a long way toward helping us understand just what degree of trend change is underway.
• At this point, our "target" level has been reached; in fact at 1105.87 yesterday afternoon into the close, the lower part of our target range (1109) has been slightly violated. As we have been writing, we have several indicators we rely on to give us a sense of whether or not a support level has been found: (1) the Elliott wave count, (2) DeMark selling exhaustion indicators and, (3) divergences against momentum (i.e. momentum not confirming new price lows). So where do we stand on each of these relative to the SPX?
• The Elliott wave count off the 1163 high count "cleanly" (i.e. has good internal Fibonacci relationships) as a completed 5 waves so all the pieces are in place Elliott wave-wise for good support to be found here. Oftentimes, within the 5 wave down impulse sequence, the top of wave 4 (in this case yesterday's AM 1125.96 high) dissects the 5 wave sequence by phi, or 0.618. If that relationship were to hold in this case (making for a "perfect" rather than "clean" internal Fibonacci wave relationship), then the wave 5 bottom for this entire sequence down from the 1163 high would project to 1103 exactly. And looking at the wave count on our 5 minute charts, we can see that one more up-down sequence is necessary to complete the final 5th wave of this entire move down from 1163. To the degree that tomorrow's open sees just such an "up-down" sequence that holds at or above 1103, then the Elliott wave count for this move down from 1163 would not only count complete, it would have ideal Fibonacci relationships within its structure.
• DeMark indicators: on a hourly basis, both TD ComboTM and TD SequentialTM selling exhaustion indicators were triggered back-to-back into the close yesterday. The way these indicators work make this a fairly rare phenomenon, so they are worth paying attention to. As importantly, we have been waiting for them to trigger and now they have, lining another one of our "ducks" up on the side of potentially getting near a good bottom.
• Momentum measures on an hourly basis have not registered positive divergences as of yesterday's price action. But on intraday charts of 21 minute bars or lower, we are seeing momentum divergences however, suggesting that the A leg of the expected ABC move down might be nearing a low. Generally, positive hourly momentum divergences occur only on the C or "5th" leg of a larger degree downward impulse move, so we use 21 minute and lesser charts to watch for positive divergences for the developing legs within waves. So far so good; the SPX is showing those positive divergences.
• So we've got all three of our primary indicators lining up for a bounce here if we get one more small up-down sequence in the AM that finds support between 1106 and 1100 (1103 is ideal). A tentative target for the B wave bounce off of an 1103-ish low would be 1126 to 1140, the 38.2% and 61.8% retrace of the A leg, a common relationship for retracements. The B leg retracement should take approximately 3 trading days and possibly as long as 5, but the time projection is less important than the price projection.
• How will we know if we're wrong? Prices should not accelerate thru the 1100 level on the downside or the 3rd wave of the first A leg down is still playing out. If 1100 is taken out impulsively, we'll just have to stand aside and wait for more evidence that the A leg is finished. Otherwise, long positions taken around 1103 should use a 1097 stop. With 23 points of potential upside and 6 of downside, the risk/reward of this trade is favorable.
• It's important to keep in mind that even if the bullish scenario is playing out (that the move off the high is only an ABC pullback before new swing highs above 1163), the likelihood of lower prices that we see today are high. After all, NYSE volume yesterday was the 2nd highest of the year (2nd to 1/29) and advance/decline was -1637 a slight uptick from yesterday but still below all readings from July 2003 to now. These suggest that momentum remains on the selling side and that the full ABC down move is not yet complete.
Nasdaq 100 (NDX)
• The EW count on the NDX is less clear than the SPX on a daily basis because the NDX has been falling for much more time. We had targeted 1400-1425 as a support zone and prices today collapsed into the bottom part of this range. So, again how are our ducks lined up w/r/t: (1) Elliott wave count, (2) DeMark indicators, and (3) momentum divergences?
• The Elliott wave count on a daily chart, as we have suggested earlier is this. From the top on 1/20/04 to now, there are two ways to "count" the action from an Elliott wave standpoint. The bullish interpretation is that the entire corrective action from the 1/20/04 move is taking the form of a three wave, ABC pullback. Oftentimes, the A leg and the C leg of ABC pullbacks are roughly equal in price. In the NDX's case, the A leg was roughly 100 points (1560 to 1460 from 1/20 to 2/04). From the B wave top at 1524 on 2/19, 100 points down gets us to 1424, but the impulse down so far is already at 1400. Shallow, ABC-type corrections often have A legs that are equal to C legs on points. So far this C leg is already larger than the A leg. The next Fibonacci relationship is at c=1.618*A, which, as we pointed out yesterday, would make the c or 3 leg projection 1360-1370 before a bounce of meaningful proportion was expected. Because wave 3's are often 1.618* wave 1's, the weight of the evidence is growing for the more bearish interpretation. And that is: that the impulse wave down we are experiencing now is a "3" rather than a "C", which means that once "3" ends, we'll need one more up down sequence to complete a larger 5 wave impulse move. And that would, in all likelihood, take us lower (at least another 60 points from the 4th wave top and possibly 100, but there's no need to get that far ahead of ourselves) before the first large complete impulse wave down can be considered over.
• From a DeMark standpoint, one TD Sequential 13 selling exhaustion indicator was triggered right at yesterday's close. So the Demarks are lining up in favor of a bounce much more than they did yesterday. We'll have to see how this plays out in the AM.
• From a momentum standpoint, like the SPX, we are seeing positive momentum divergences on the 21 minute and less charts, suggesting that a wave iv bounce might be at hand that could retrace 38.2% to 61.8% of the move down from the March 5th 1494 high. Those levels are 1436-1458 for a wave iv target. From that area another leg down would be needed to complete the larger "C" or "3" leg of this move. As we approach those target prices, we'll be able to more accurately pinpoint an important resistance level to expect price to retreat from.
• So if we see a good low form tomorrow around the 1400 level (1402ish would make wave i equal to wave v - a common relationship- of this leg down from 3/5/04 high), a move to 1436 to 1458 could ensue. Like the SPX, perhaps one more small up down sequence in the AM will complete the very short term waves to our 1400ish target. We would be wrong if the 1395 level is impulsively broken through on the downside; this would imply that wave v of this move down from 3/5 is extending and we'd step aside and wait for a better entry risk/reward point. So stops on any positions taken in the 1395-1405 area should be set tight (my opinion), at 1390. With an upside of 36-58 points from 1400, we think the risk/reward of a long position makes sense in the 1395-1405 area.
Like the SPX, we want to remind Minyans that the larger trend down is not complete and that this scalp trade on the long side is just that: a potential scalp. The most probable count suggests at least one more larger up (1436-1458) and down (1360-1370) sequence is needed before a multi week bounce could be expected. Again, let's just trade what's in front of us and not get too far ahead of ourselves. If the technical indicators present good risk/rewards, we'll take them until we get more evidence of the degree of trend change we're dealing with here.
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