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Applied Complexity Analysis



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.

Prices opted to bounce Monday and subdivide yet lower on Tuesday's session, continuing to trace out a nice clean 5 wave impulsive decline from the March 7th peaks. We suggested in Monday's note that we were looking for a bounce, and that remains very much the analysis today, despite the fact that prices fell through 'important' (read: obvious) supports yesterday.

Our message is very simple right now: we have high confidence that the larger degree (multi-week/month) trend is bearish but the short term is showing enough short term bottoming signs that we should expect a counter-trend bounce that carries back to important Fibonacci resistance over the next 6-10 sessions. Net/net we're bearish long term but not pressing the short side at these prices (not advice). Patience will be key; it seems that our expected bounce could well take stocks right into the quarter-end mark-up period before the dominant larger degree bear trend reasserts itself with vigor. Breadth, volatility, down vs. up volume, momentum: all are showing signs of a multi-session bottom could be formed around this area. As well, since we can count a clean "5" waves down with (nearly) perfect internal Fibonacci relationships), we think the bounce probability is significant.

In our note dated February 16th, we said: "And on this point, again, we want to be expressly clear, because you are not going to read or hear this from other sources: we are expecting a major peak to be registered soon in all indices and a major bear market decline to begin very soon. No one on the sell-side is saying this because the fundamentals do not portend this; the economy does not suggest this. And those are precisely what makes this a strong possibility. Stocks lead those measures, as they have at every important turn this century. So find no comfort or solace in the fact that things aren't 'so bad' in the economy. It isn't the economy you should be watching, it's the stock market. And right now, the stock market indicators we have developed are saying some very bearish things."

Why do we bring this up? Because at the time the blue chips looked very much like they were "breaking out" and any mention of a bearish resolution to the underlying action was met with skepticism, derision, or worse. Now that the SPX is down by 320 basis points from that level (and the NDX down by 500 bps), and the decline from the March 7th peaks has indeed traced out a 5 wave impulsive move, we have even higher confidence than we did then that the probability for a significant (and possibly major) bearish trend is present.

But here too, that same trend-following instincts in February that would have gotten investors long stocks (or worse on the Dow Theory buy signal on March 7th) is saying short them now. And again the present risk/reward juncture does not suggest being aggressively bearish despite the "breakdown" yesterday through some obvious support levels. Investors should be patient; we expect a 6-9 day counter-trend bounce to take place before a good risk/reward bearish stance is warranted. But once we get that bounce, the bearishness will "feel" as difficult as bearishness in February did, but the risk/reward will still demand we take the trade.

For now then, since a confirmed bear trend, the surprises will be to the downside, we suggest patience into the quarter-end markup. Stay tuned.

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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