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Advanced Technical Analysis



S&P 500 (SPX)

We have been waiting, patiently but anxiously, for a low around the 1102 level for several days now. Prices reached that level after the Fed announcement and bounced smartly from them into the close, suggesting that a low of some degree is in. The question for traders is: what degree?

The Elliott count still has two scenarios as possible in the near term: prices over the next day or two will tip the scales toward one or the other being the right one. They are: (1) that a completed five wave down impulsive move ended at yesterday's 1102.61 low and should see a move toward our 1125-1140 resistance levels OR (2) that prices remain in a "flat" wave iv correction that should top around 1120 before seeing another smaller leg down toward very slightly below yesterday's 1102 low. Both interpretations remain operative at this stage, though, if our NDX count is correct, the more probable of the two is that yesterday's 1102.61 low was the completion of the first leg (again either A or 1) down from the 1163 high.

From an Elliott standpoint, here's what we can be highly confident of (based on the momentum and Fibonacci profile of prices from the 1163 top to that low point): that the 1105.87 low on March 11th was the bottom of a wave iii low. What we need to identify from that point forward is a clean ABC rebound as wave iv and then a clean impulsive 5th wave down to our cited support levels. That should then be the bottom of either a larger A wave or 1 wave, with the expectation of a rebound that takes prices to a 38.2%-61.8% retracement level.

Can we do that? Well, prices traced out a clean overlapping ABC rebound with last Friday's up move to 1120.63. So there's a possibly completed wave iv. What about wave v? That's a bit trickier, but we can still "see" it, though it's complex. The final 5th wave would have played out from the March12th high to yesterday's low with lots of overlap within the move down, which is characteristic of ending 5th waves, as they often have overlapping structures (e.g. wave iv and wave i overlap, which can only happen in ending 5th waves).

So what of the Demark and momentum indicators we look at? Are they also confirming our near term bullish Elliott wave count? Yes: momentum has positively diverged against prices on hourly charts and less (see charts). The Demark indicators on 21 minute charts or smaller all showed important selling exhaustion indicators during the day, with some marking the exact bottom in prices in the afternoon. So, when added to the hourly selling exhaustion indicators that ticked last Thursday at the wave iii 1105.87 low, the Demark evidence of an important low continues to accumulate.

Given that both of the scenarios we cited above call for a move to at least 1120, keep an eye on that as a potential profit taking point, depending on how prices move toward that level: volume, ticks, breadth, impulsiveness of wave form, etc. Watch for a small wave ii pullback from the initial impulse wave up from yesterday's 1102.61 low. We can "see" the first impulse wave up from 1102.61 to yesterday's PM high of 1112.75. A 38.2% to 61.8% retracement move to correct this 10 point move could happen first thing this morning, taking prices to the 1106-1109 support area.

Once again, we have said in each of our missives that a bounce toward the 1120 and possibly the 1125-1140 level, is merely a counter-trend scalp, as prices are expected to trace out at least another impulsive-looking wave down from whatever bounce high we see in the 1125-1140 area. That next leg down could take prices toward 1070-1080 initially and possibly lower depending on where a potential bounce takes us in the next several days.

As always, and as a reminder, this is offered for educational purposes only.

Nasdaq 100 (NDX)

Yesterday saw prices over a wide range and finally spike to a new low after the Fed announcement, reaching below our cited support levels of 1396/98 to tick at 1394.11 before rebounding sharply (and impulsively) to 1411 into the close. So is that the low we have been looking for over these past several sessions? Let's review our three indicators:

We must start with the Elliott wave count, as that holds the best clues for the durability of a potential low at 1394. We had been looking for a wave iii low that would result in a move to 1432-1454 area before falling again in a final 5th wave (of a larger 3rd wave starting from the February 19th high) toward our previously cited 1360-1370 initial target. Are we there yet? We need to be able to count a completed 5 wave impulse move down from the March 5th high of 1494 in order to count a wave iii low complete. The wave count from the 3/5 high to the 3/10 1447 high counts well as a 1-2-3-4 of the developing larger 3rd wave. But from the 3/10 high to now, the action has been overlapping, non-impulsive (i.e. no clear "fives") and lacking good internal Fibonacci relationships. As a result, no clear lows have been able to be identified from an Elliott standpoint. What does this mean?

The action from 3/10 suggests that a triangle has been unfolding for the final 5th wave of this larger 3rd wave. In Elliott terms, triangles form in a 3-3-3-3-3 wave form fashion (i.e. 3 up, 3 down, 3 up, 3 down, etc.), and are usually labeled as A-B-C-D-E. This form is different than regular impulse moves, which take the form of a 5-3-5-3-5 wave form. Triangles are different insofar as they show decreasing volatility and momentum as the ABCDE wave form plays out, with each wave traveling a smaller distance than the adjacent previous wave (e.g. C being smaller than A, D being smaller than B etc.).

Triangles also have Fibonacci relationships between alternate individual waves, such that the C leg is 0.618* the A leg, the D leg is 0.618*the B leg, and the final E leg is 0.618*the C leg. IF a triangle has formed for the final leg of the larger 3rd wave down for the NDX, we should expect to see (1) decreasing momentum/volatility, (2) a clear 3-3-3-3-3 form, (3) prices that stay largely within a defined channel trend line, and (4) Fibonacci relationships (0.618) between adjacent legs. How does the NDX look with respect to this from 3/10? Note too that the D leg is almost exactly .618*s the distance of the B leg.

What are the implications for a triangle unfolding as the fifth wave of a larger 3rd wave down? Bullish. Prices are expected to go up at least the distance of the largest difference between legs, in this case the A to B leg: 45 points. From 1394, that would make a target of 1439, which also happens to be just above the 38.2% retracement resistance point (1432) for the 4th wave bounce that we have been looking for. So that is another piece of evidence in favor of a triangle interpretation. How about the Demarks and momentum indicators?

As our note suggested yesterday, the momentum measures on hourly charts and smaller did not confirm today's new lows, so the positive momentum non-confirmation continues suggesting that selling pressure is abating.

Demark indicators on 34 minute charts or smaller all showed important selling exhaustion indicators during the day, with some marking the exact bottom in prices in the afternoon. So, when added to the hourly selling exhaustion indicators that ticked last Thursday at the 1402.20 low, the Demark evidence of an important low continues to accumulate.

If yesterday's 1394 low was a wave iii low, then the rebound we saw from that point into the close should be impulsive and show a clear 5 wave move up. On both counts, the move up in the late afternoon is just that, furthering the idea that a good low was struck at 1394. If the first wave up ended at the afternoon high of 1411.22 (Demark indicators and internal wave counts suggest it did but it could still move a few points higher on the open), then we can expect a shallow pullback that takes the NDX to the 1402-1404 area for support should mark the end of wave ii. Then prices should accelerate higher again toward our target area of 1432/34 over the next several days. A slightly deeper pullback to 1400 is possible in the AM (the 61.8% retrace area) but a lower probability. A move below 1397 would invalidate the count we are working with.

Once again, we want to stress that this is a scalp trade since prices are expected to eventually post new lows for this move down from the 2/19 high in the 1360/70 area at least. As always, be careful (remember this is provided for educational purposes and not as advice).

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