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Advanced Technical Analysis


There's nothing sexier than a smart strategy!


S&P 500 (SPX)

Not much to add to our current view for the SPX based on the technical studies we follow. We were hoping for one more small up-down sequence on Friday to complete a more balanced complete 5-wave impulse Elliott wave down from the 1163 3/5/04 high, but instead prices mounted a strong day on Friday, price-wise, moving up to 1120, the high tick of the day, by the end of the trading session Friday. This strong move suggests that the first 5 leg impulse move down from the high is complete. Suggests but does not, in Elliott terms anyway, prove: only a move above 1125.26 would invalidate the possibility of seeing one more new low below the Thursday low of 1105.87.

Until then, the SPX can take one of two most probable courses: (1) it can continue the Friday move above 1125.26 and make Thursday's bottom the end of the first 5 wave impulse move down (again either an "A" wave or a "1" wave) or (2) it can see a pullback today or tomorrow below the 1105.87 level to finish off the first impulse move down. As of Friday's close, it's difficult to have conviction either way: the evidence that wave A ended on Thursday is there, but the move up from Thursday's low isn't nearly impulsive enough to qualify as a multi-day trend change toward higher prices. As you can see from the intraday chart, the move on Friday, though up, labored, with plenty of overlapping price movement. This type of price activity is, in Elliott terms, labeled "corrective" and counter-trend. Only a clean small degree 5 wave up sequence from a low established in the 1100-1110 area would give us more confidence that a bottom of some degree was seen.

So we will wait on today's price action to tell us more about whether in fact Thursday's low was the bottom of Wave "A" or if in fact Friday's overlapping "corrective"-type action was simply a pause in the trend down toward one more new low before a countertrend move up of several days duration can be expected. Keep in mind our comments from Friday, however: the likelihood of lower prices than we see today are high...momentum remains on the selling side and that the full ABC down move is not yet complete."

If price action today confirms that Thursday's price low was the bottom of the first leg down in the SPX, the retracement should take prices to 1127-1141 before failing again and then turning down impulsively to make new lows for this move. If prices confirm a good low was struck on Thursday, we'll be able to develop a more narrow target as the week evolves. At this point, our indicators do not suggest a high confidence trade on the long side or short side at this juncture. If prices move through 1125.26, the probability that Thursday's low was the bottom of Wave A increase substantially. If prices continue to chop around sideways in this corrective fashion, the probability for another low under 1105 increases.

Nasdaq 100 (NDX)

The EW count on the NDX is more clear with respect to Thursday's low of 1402.20 being the bottom of a minor degree 3rd wave. Prices on Friday cleared Thursday's peak at 1429.10 which increased the odds substantially that Thursday's low was, in Elliott wave parlance, a third of a third wave bottom. From that point, it is reasonable to expect a bounce from that could take prices into 1437-1459 area (the 38.2%-61.8% retrace) and last several days. 1447 is also a target as this was an internal 4th wave peak, which often acts as a target for retracements like the one that seems to be underway in the NDX.

For now, as with the SPX, the larger count suggests that this is simply a bounce to relieve some oversold conditions before new lows are seen. The larger Elliott wave pattern is not complete as even within the impulse wave down from the 2/19 1524 top, we need to see an up-down sequence before another bounce should materialize. It looks like we are in the "up" portion of that expected "up-down" sequence now. Once the targeted retracement area is seen (1437-1459 area), another leg lower that takes prices well below 1402 can be expected (our initial target areas for that "5th of a third wave" is around 1385 +/-5 points).

A note on our technical indicators:

The basis of our technical analysis employs a proprietary combination of Fibonacci, Demark indicators, Elliott wave, and momentum measures (MACD, RSI), across a multitude of time frames to identify support, resistance, and buying and selling exhaustion levels for indices and stocks. We then compare these indicators against prevailing sentiment measures, looking for clearly excessive bullishness or bearishness, which generally provides the best risk/reward characteristics. Finally, we attempt to identify stops that are as tight as possible but that allow for some wiggle room in our technical analysis. Our stops are placed at points that would "invalidate" much of the supportive evidence behind the technical call and thereby signal that other buying and selling forces are at work than we have concluded.

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