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Applied Complexity 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.



Friday's note said: "One more small "up-down" sequence where the "up" move does not overlap with SPX 1201 (the lows from March 10th) would produce the "5" wave move we are looking for to confirm the bearish trend. If such a pattern plays out...we would then be in a position to expect a multi-session bounce that will be the best risk/reward setup for lower prices in years." (Not advice)

Friday in fact produced what looked very much like that "up-down" session, with all the attendant bullish divergences (ticks, momentum, breadth, volatility, and down vs. up volume, as we showed in Friday's note) that we look for when anticipating a multi-session bounce. Though we should allow for the market to sub divide slightly lower in today's session, it is important to note that all the minimum requirements for a few days bounce to take place, so that need not take place for a healthy bounce to occur.

And because the previous decline (from March 7th) was an impulsive "5" wave affair, we have high confidence that this multi-day bounce will be corrective (3 waves) and be turned back decisively by upper Fibonacci resistance. For this week then, we can expect to see (from either Friday's or perhaps today's lows) a 3-6 session bounce that carries 150-250 bps for the blue chips and 200-320 bps for the NDX. Patience will be key: SPX 1200-1211, DOW 10720-10820, and NDX 1505-1525 are important Fibonacci resistances for this bearish view and it should be Wednesday at the earliest that we see some sort of peak in prices.

We are not pressing the shortside bet here; the prudent interpretation is to allow for the markets to move to these resistances and then look to position for a potentially aggressive move lower. The very aggressive interpretation looking for a bounce over the next few days, suggests using SPX 1178, DOW 10500, and NDX 1470 as key levels for any speculative positions; any move through such levels would force us to the sidelines. Otherwise, the best risk/reward scenario in the markets will likely be to position for weakness from a three wave move to those upper resistances we cited with stops from the March 7th peaks (not advice).

We think it is important to note that this "5" wave move down in the blue chips potentially signals something very important about the larger trend in the markets. This could well be a very significant top that just registered on March 7th. Traditional econometric models, fundamental analysis, and even most technical analysis are unable to make such a prediction about the market's trend because these models are linear in their design. Because the markets are complex, non-linear systems, we must use non-linear models to take a measure of the markets many regimes: bullish, bearish, sideways. Our non-linear models strongly suggest that the March 7th peaks could be significant peaks that last a very long time. Only subsequent price action can add to or detract from that assessment, but for now that statement remains a confident one. And more importantly, the upcoming setup should be an attractive one from a risk/reward standpoint.



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.

No positions in stocks mentioned.

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