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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.

Wednesday's and Thursday's price action has provided a bit more clarity to the short term picture; it is possible that the SPX (and OEX and NYA) are tracing out the final portions of their respective 5th waves off the lows from both February 22nd and January 24th and in so doing also completing the moves up from Aug 2004 and March 2003.

The principle reason we feel this is possible despite the fact that the SPX has not made it to the Fibonacci projection we cited in Wednesday's note (of SPX 1227/34 area) is that an ending diagonal with highly overlapping waves may have formed from the lows of February 22nd. This diagonal also comes amidst solid divergences in momentum, breadth, ticks, and volatility; all of which signal that a potential decline could be imminent. The diagonal pattern formation carries important implications and indeed provides a good risk/reward scenario to the downside. Ending diagonals are termination patterns; they signal the end of a pattern of one larger degree: in this case the end of the bounce from (at least) February 22nd.

Because yesterday's price action produced a throw-under of the operative channel lines (please see the 13 minute chart), we can reasonably expect a consequent throw-over above those channel lines today in a 5th wave toward 1218/1220. Such a throw-over would then be expected to fail hard at that 1218/1220 area and then produce a meaningful decline to at least the beginning of the pattern, in this case at least to SPX 1195-1198 and possibly much lower.

The best aspect of this setup is the tightness of the risk: exceeding SPX 1223 would negate the triangle pattern and suggest the SPX is morphing into another pattern that is not yet complete, possibly onward to our upper SPX targets in the 1227/34 area. In either case, we remind readers that we are looking for the start of a bear trend in the markets based on our interpretation of the long term analysis we have been following. The possibility that an ending diagonal is forming in the SPX clarifies the short term picture and suggests that short term may be resonating bearishly with that long term view.

For now then, weakness in the SPX could result on a spike today above 1215 toward the 1218-1220 area with stops (hard) based on the analysis at 1223.

The NDX, as we have been repeating, is in a much more bearish trend and is posting a very large non-confirmation to the blue chip indices. To the extent that the NDX bounces toward the 1535/40 area today with a spike up in the SPX, we think weakness could result there with trade moving through 1542 forcing us to re-evaluate this bearish view.

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No positions in stocks mentioned.

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