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Applied Complexity Analysis

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Thx Scotto!

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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.


Friday's new lows in almost all of the major indices (SPX, NDX, DOW, RTY, OEX) introduces an interesting and potentially binary outcome over the next several days. Readers are aware that we have been looking for a 5 wave move off the lows form January 24th to complete potentially the entire pattern from the 2002 lows and thus lead to the first significant bearish trend since.

In Friday's note we suggested that one more new peak (in an ending diagonal) was needed above the peaks registered on March 7th to complete the bounce from January 24th. Specifically, we said: "Such a peak, should it come next week, would be THE technical inflection point (setting up for lower prices) we have been looking for in these indices, as it would complete the minimum requirements for an ending diagonal pattern. Having said that, coming below SPX 1193, OEX 570, DOW 10690, NDX 1500 and RTY 623 anytime before a new peak is registered would mean the peak we are looking for has already been formed at the March 7th highs."

Though prices (marginally) held above these lows on Friday, the form of the price decline from the peaks on the 7th could possibly be considered to be a "5" wave move and thus impulsive and trend-changing. Such an interpretation, though not a high confidence one, would mean that the peaks registered on March 7th were the peaks we have been looking for and that a significant decline would ensue over the next several weeks and months from those peaks. At Friday's close, there were some short term divergences that argue for some sort of corrective bounce: momentum, breadth, down vs. up volume (ticks and volatility confirmed the lows). These indicators suggest some sort of bounce may be approaching.

And therein lies the binary nature of the coming setup. If the peaks from March 7th were THE peaks we've been looking for, we should expect to see a hard and concerted fall from the Fibonacci resistance area of SPX 1210-1220 area this week (not advice). Friday's lows, owing to the pattern in which it formed, increases the odds that the March 7th peaks were very important. But the view remains a low confidence one whether or not they are. What will make us more confident?

If the bounce we are expecting soon develops into a corrective, 3 wave affair that stalls at important resistance in the SPX 1210-1220, DOW 10850-10900, OEX 578-581 and RTY 633-639 areas, that will argue strongly that March 7th was a very important peak that will not be exceeded and will lead to a significant decline. Any move above SPX 1223, DOW 10930, OEX 584 and RTY 643 will mean that slight new peaks (recall SPX 1234 is a target) are instead in the works before the significant decline that we are looking for starts.

The technical setup is straightforward then: a corrective bounce this week into the above Fibonacci resistances would provide a good risk / reward scenario for a move to the downside with trade moving through SPX 1223, DOW 10930, OEX 584, and RTY 643 levels forcing us to the sideline. We would be patient until we see enough of a bounce into those areas to be confident it is corrective or impulsive.

The NDX remains, again, much more bearish than any of the blue chip indices. We would look for weakness in the NDX from the 1520-1540 area (a move past 1549 would cause us to re-evaluate this near term bearish view) with the aggressive interpretation presenting itself if the blue chip indices look corrective in their bounce to resistance.

Please note: We are now able to offer our proprietary complexity model analysis on both stocks and/or stock indices as a daily service to institutional investors and a select number of individual investors. There are several different services available; each are provided on a monthly subscription basis and cover all U.S. indices and all U.S. stocks. Please contact us for details and rates.


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No positions in stocks mentioned.

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