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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.

On Friday both the SPX and DOW exceeded the containing upper trend lines in a throw-over spike. However, both the pattern of that spike up and the fact that SPX and DOW prices exceeded SPX 1223 and DOW 10920 (by 1.76 SPX points and 42 DOW points) does introduce another scenario for price action in the short term. To that end Friday's peak (or a very slight new one today) will ultimately be the important peak we are looking for (and hourly Demarks and momentum / volatility divergences are favoring this interpretation) OR prices could continue to advance in a choppy fashion toward the next layer of Fibonacci resistance we identified several weeks ago: 1227-1234 and above that 1250/60.

As we have attempted to make clear, the NDX remains in a bearish configuration and continues to suggest a bearish resolution to the current action is near; as well, our long term technical indicators have not wavered one bit from the bearish view. Declining at anytime beneath SPX 1200 and DOW 10660 will suggest the peak is in and that no subsequent probe higher is expected. For the NDX, the aggressive interpretation provides for a good risk/reward to the downside between NDX 1525-1535 with trade moving through 1542 forcing us to stand aside.

We said early last week that the NDX had two possible targets: below 1542 (in the aforementioned 1525/35 area) or slightly above 1561. At this stage since the NDX is lagging so badly (a condition that has manifested only a few times to this extreme in the last several years) we believe it is reasonable to expect the former: that the NDX turns down from below 1542. So that will remain a critical stop based on the aggressive interpretation.

It is axiomatic that important peaks are processes and not discreet events and traders can certainly be forgiven for becoming frustrated in the face of a topping process that we have been describing for the last 40-50 days. But don't mistake that frustration with missed opportunity.

The NDX in the month of February lost 60 basis points. And in March so far it is up 70 basis points. And while blue chips have performed better than the higher beta indices, the technical models we have developed allow us to recognize points of greater or lesser risk. The 3.4% gain from late January to now in the SPX has come amidst some of the more extreme risks we have seen in the markets since the lows in October 2002 and those in March 2003.

And while that is no solace today, as the market's close on Friday was higher than anytime since August 2001 and financial pundits are generally bullish and satisfied with their long risk exposure, our models suggest such comfort with the long side could soon turn into something far less benign.

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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