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.
Friday witnessed a reversal in all of the major indices, this after some reached new intraday highs (NDX, Nasdaq Comp, OEX) while others did not (DOW, SPX, RTY), showing the intra-market divergences that are characteristic of important turning points. We do not have to reiterate that we have been looking for a counter-trend peak for the last week; Friday's note summarized the setup we were looking for: "prices within the targeted price and time Fibonacci resistance, momentum divergences, breadth divergences, and Fibonacci wave equality. Hourly DeMark trend exhaustion indicators are registering for the SPX and NDX futures while the NDX, DOW and SPX cash markets could do so in the first three hours of trading today; again, another plus."
Friday saw ticks diverge but volatility did not, so the VXO was the only 'contextual' measure we use that did not provide an ideal setup for a trend reversal. We continue to believe that two scenarios are most probable from current prices: (1) Friday's peaks were THE peaks from which a serious and swift decline will take place, dropping 1000 DOW points over the next 1-2 months or (2) we see a decline that is labored, choppy, stays above the March 29th lows and then finds a temporary bottom from which to try to reach higher into the time and price Fibonacci resistance window we had earlier outlined.
If the more bearish scenario is operative, we could see the March 29th lows give way swiftly as the DOW drops perhaps 1000 points heading toward 9600, the SPX loses 65 points headed toward 1085, and the NDX declines 190 points toward 1313 (not advice). Otherwise, if the March 29th lows hold any decline that started last week, that would be the signal that some sort of more complex (double zigzag) correction is unfolding and we'll simply have to give the market time to fulfill those ordered targets.
What does this current setup mean for our analysis? We said on Friday that the bearish view makes sense for either scenario; we'll ride the decline if scenario (1) is operative, or cover at lower prices if (2) is. The same holds true today: futures are bouncing from the lows registered on Friday. If scenario (1) is operative, this bounce should fail and not make new highs. As a result, we would be aggressively positioning for weakness on any bounce today in each of the indices, with a move through last Friday's peaks forcing us to stand aside (not advice). Even if scenario (2) is operative, one more leg down like Friday's decline (but stays above the March 29th peaks) is expected. We'll cover if it looks like the March 29th lows are going to hold. At this point however, we think the probabilities are weighted (65/35) toward the more bearish scenario (1): a fairly quick 1000 point drop in the DOW.
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.
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