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Advanced Technical Analysis



Note: the following analysis is formulated as an assimilation of technical indicators. It is offered as education and not intended as advice in any way.


The SPX remains within an important leg down that should eventually see prices reach the 1065 level; the Elliott wave count in the SPX is open to multiple interpretations but all of them suggest prices may eventually move toward our initial 1065 target: the question for traders is if prices rally toward 1110-25 first or head straight there. On balance, the evidence points toward prices moving lower from here rather than bouncing meaningfully into the 1125 area. The NDX is nearer to our previously cited 1360 target and the Elliott count and Demark indicators suggest it needs one more new low beneath 1369 to complete this leg down before a bounce to 1425/1445 region might be expected. The Dow is the "cleanest" of the three indices at this juncture, showing a clear 5 wave impulsive move down with nice internal Fibonacci symmetry. A new low beneath 10012 that holds at or near the 10000 mark or possibly 9940/9960 could complete the Elliott count and bounce toward 10280/10460.

We caution however that picking bottoms in this environment could be very tricky: traders should await clear evidence that a trade-able bottom has been struck before entering the waters. Remember: these moves down are not yet near complete, so the overall bias should remain to the side of caution.


S&P 500 (SPX)

The SPX broke down right from the start on some of the worst market internals (breadth, advance/decline, trin, etc.) so far in this pullback. The weight of the technical evidence suggests that prices are set to move directly toward our 1065 initial target in the SPX, but traders should be aware that a bounce to 1125ish remains a possibility, as both the NDX and INDU are poised for a possible bounce from slightly lower levels.

The Elliott wave count is open to multiple interpretations still, though today's decline made it less probable that prices are tracing out a flat wave iv correction, as prices needed to find better support in the 1100 area. So either (1) prices are in wave C or wave 3 down toward our initial 1065 target or (1) a more complex and ultimately bearish pattern of unfolding "1"s and "2"s is tracing out that will take prices considerably lower than 1066 and do so with fewer and smaller bounces. Before we go into some aspects of this decline that are important to understanding the degree of trend change that might be happening, let's look at our momentum and demark indicators.

Our hourly demark indicators failed to register a valid selling exhaustion point in yesterday's trade, and as a result does not provide us with evidence of a bounce yet. Momentum measures are decidedly down and so far confirming the weakness in prices, so there too, we still remain cautious based on our momentum measures. The net of the Demark indicators and momentum measures suggest that prices are set to decline to our 1065 initial support target.

So while the Demark indicators and momentum measures are suggesting that the 1065 target area will be the next important projection for prices, the Elliott wave pattern remains bearish at least for one more new low below 1089.49 before even a small 5 wave down impulse move can be seen from last Thursday's highs. What happens at one more new low will be telling, as both the NDX and the DOW are poised for a possible bounce. Though it is possible, it remains improbable that the SPX would not bounce while the NDX and DOW did, so we'll be watching SPX price action on any new low below 1089.49. Should prices find support there, a rally off that level could bring us to an initial target of 1100-1110 on the upside where we would become cautious.

Interestingly, the move down yesterday registered the worst market internals of the entire decline from the SPX 1163 peak: breadth, advance/decline line, trin, etc.) All registered new extremes for the move down from 1163. Why is this important from an Elliott wave standpoint? Typically, wave 3s of a 5 wave pattern are the most "violent" (up or down) and show the most aggressive internal measures (again, breadth, advance/decline, trin, volume, momentum, etc.). It is an exceptionally rare occurrence that wave 5s show the extreme internals. We bring this up because our current Elliott "count" in the SPX is in fact that we are in a wave 3 down to at least 1065 and possibly 1020-30. So far then, yesterday's internals are "confirming" the operative SPX count we have been following.

However, both the DOW and the NDX counts we have been following are suggesting that they are in their respective 5th waves down: the 5th wave of wave 1 down for the DOW and the 5th wave of wave 3 down in the NDX. The market internals yesterday DO NOT conform to the "norm" for a 5th wave down (of either wave 1 for the DOW or wave 3 for the NDX). Yet the counts we are following there "look" the cleanest from an Elliott and Fibonacci perspective.

What does this mean? It suggests that we need to be extremely cautious in trying to pick a bottom here and wait for many of our technical indicators to line up and provide us with confidence that the weakness is over.

Nasdaq 100 (NDX)

The NDX's Elliott wave pattern is both clearer and "cleaner" from a Fibonacci standpoint. Our count has prices soon completing, with one more new low below 1369.36, a 5th wave of the 3rd wave that has been in force since the February 19th 1524 high. We have been targeting the 1360 area for some time now and prices seem to be setting up for a good low to be found in that vicinity (1355-1360 would provide nice Fibonacci symmetry).

As we discussed above in our SPX analysis, yesterday's market internals did not quite confirm that we are tracing out an ending 5th wave, as 5th wave internals often diverge against the 3rd wave internals (again either on the upside or downside). For the NDX they did not do that. That said, that Elliott "rule" is but one of many that we need to keep an eye on. So we cannot fully abandon a "1360 bounce" possibility quite yet.

Demark indicators did in fact register a valid very near term buying exhaustion indicator at 1:30 pm yesterday. Our experience with the Demark indicators is that valid "8" or "9" selling exhaustion indicators can provide a 1 to 4 price bar (in this case 1-4 hours since we're using hourly charts) rebound before resuming the dominant trend toward a valid TD Sequential or TD Combo "13" (like the one that registered on the wave iii bottom on 3/11). As the Elliott count "needs" one more new low beneath 1369 and the Demark trend exhaustion indicators still need to progress toward a high confidence "13" trend reversal indicator, we'll look for more evidence that a trade-able bottom is near.

As we admonished in the SPX discussion above: picking a bottom will be difficult. Traders should remain cautious until a more high confidence setup that includes the completion of all three of our trend reversal tools comes to fruition: Elliott wave count, demark indicators, and momentum measures. So far, we are close, but not quite there.

Dow Jones Industrials (INDU)

We're including an analysis of the DOW today thanks to its relative clarity in Elliott wave form, Demark indicators, and momentum measures. Of all three of the major indices, this one seems to be closest to a trade-able bottom, as a clear 5 waves down can be seen from the top on Feb 19th 10,753 top. This first wave has nice internal Fibonacci symmetry (i.e. there are multiple Fibonacci relationships among and between the various waves), making our working count a more high confidence call. The pattern and the Fibonacci relationships in the DOW suggests that one more new low beneath yesterday afternoon's 10012 low is needed to "complete" the Elliott wave count. Our downside projections are first 10001/03 (ideally as it corresponds to the psychologically important 10000 level) and then, if the 10000 level fails to hold, the 9940/9960 area before a bounce could be in the offing. Initially, should prices bounce from the 10000 level, we are targeting the 10280-10460 area for a bounce before prices resume their decline.

The demark and momentum indicators we use are also suggesting that a trade-able bottom will be soon upon us with one more new low beneath the 10012 low that registered yesterday afternoon. The hourly chart shows clear momentum non-confirmation on the yesterday afternoon lows. The hourly demark indicators did not however register a valid trend exhaustion indicator yet but may in fact do so on one more new low beneath 10012. We'll have to wait and see how the Demarks line up for a trend reversal signal.

We have found that, at important tops and bottoms, an important inter-market divergence often occurs where one index fails to confirm the new lows (or highs) seen in the other two indices. We are highlighting the DOW this AM for this reason: given the wave counts that we are currently using, it seems entirely possible that the DOW will make a slight new low tomorrow under the 10012 and bounce from that level to the 10080-10100 level while the NDX and SPX maintain their downward bias for a day or two longer and put in fresh new lows while the DOW stays above whatever low it puts in around 10000-10012. We are obviously speculating here, but such a setup would not only have the benefit of providing more evidence that our working Elliott wave counts are correct, it would also provide a somewhat classic inter-market bullish divergence. We'll simply have to see how the DOW plays out over the next two trading sessions to become more confident of this setup.

As we have cautioned in our previous pieces, the larger trend remains down for all three of these indices: prices are set to exceed all of our cited "bounce" levels on the downside (SPX 1065, NDX 1360, DOW 10000) by a potentially substantial margin in the next several weeks.

No positions in stocks mentioned.

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