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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.


Coming into Tuesday, prices were set to decline to important support and then rally impulsively to new swing highs if those supports held. In all three indices, those important supports were broken; most importantly, they were broken impulsively and on very strong downward momentum. This negative breadth (7 to 1 down) and down vs. up volume (nearly 90% down volume) are ominous signs for any bullish scenario that was developing. The SPX's and the INDU's impulsive waves down from the AM gap higher do not yet "count" complete as the late day minor rally looks like an internal 4th wave that will result in slightly lower prices today for both the SPX and INDU before a clean 5 waves down can be counted and some degree of bounce expected.

The NDX's intraday pattern looks similar: the bounce at the end of the day looks like an internal 4th wave that could resolve lower today before expecting some degree of bounce to correct yesterday's move down. Once these 5 wave impulsive moves down are complete from yesterday's gap higher, we'll have a better sense of the intermediate term trend in all three indices. For now though, the implications of a failure to hold support, the impulsiveness of the day's decline, and the remarkably strong momentum this down move exhibited, have substantially weakened any bullish scenario and have renewed the heretofore low probability bearish scenario. If the intermediate term bearish case is operative, traders should wait for a clean 5 wave impulsive move down in the SPX and INDU to present itself with one more new low beneath SPX 1127 and INDU 10362. If the NDX falls through 1470, the gap at 1453 is likely to be filled, a 1%+ move down.


S&P 500 (SPX)

Just when we thought we had a good risk/reward on our hands with a decline to 1140-1143 that held above at 1137, the SPX sliced easily through the 1137 support level on multi-year weakness in terms of negative breadth. In yesterday's piece our first two charts were of the non-confirming tick and advance/decline indices, which showed that some sort of correction was probable. The degree of that decline surprised even us.

The principal reason that the decline was a surprise is that much of the price action from the 4/5 high in the SPX was overlapping, suggesting that the 3-4 day congestion in the 1135-1147 area was corrective action before another impulsive move up could be expected. As a result, the highest probability trade was for an eventual move to a new swing high above 1150 once we could identify the first impulsive move up. We said yesterday that "ideally, the 'first 5' wave impulsive move from 1134 is near completion and would likely result in a slight pullback to the 1140-1143 area before resuming another impulsive move up toward our initial targets." Well, yesterday's steep decline on strong momentum suggests that instead of the "first 5" up being a wave 1 of a new move above 1163, it was in fact a wave C that ended an expanded flat correction that started in the afternoon of 4/7. Or at least that's the Elliott wave count that adheres most strictly to the existing price action and momentum profile.

The next few days are going to be critical to clearing up the intermediate term (multi-week) trend of the markets. We have been saying that we wanted to see how prices "acted" around these levels for some time now. Yesterday's price action adds considerable weight to the intermediate term bearish scenario that says that the entire move up from the 3/24 lows has been a wave 2 correction. What needs to happen to convince us? What needs to happen to refute that and re-establish the bullish scenario?

If the 3/24-4/5 move was just a wave 2 correction, prices need to accelerate lower in a wave 3 from here and do so both aggressively and with strong momentum (i.e. poor internals like today). The SPX needs to break through 1126 today and over the next few sessions fill the gap at 1116 and slice though 1111 support on the downside. Prices should not exceed 1138 on any bounces that develop.

That said, if the move up from the 3/24 lows was the start of a new impulsive trend toward 1163 and higher, then prices need to find support above 1123 and absolutely 1112 and need to do so very soon (today or tomorrow).

So there are the parameters that will help us determine just what kind of intermediate term trend we are dealing with. The impulsiveness of the down move and the terrible internals strongly support a bearish intermediate term call. But we cannot yet dismiss the bullish case. More price action and wave form will help us determine if that becomes a tradeable call or not soon. For now the analysis suggests remaining cautious until we can (1) identify a clean 5 down from yesterday's open and a corrective rebound that halts at phi resistance levels or (2) a clean impulsive move up that starts in the next session or two that suggests this move was simply a correction of the 3/24-4/5 advance.

The Nasdaq 100 (NDX)

The NDX showed an impulsive move down on the same type of terrible internals that the SPX and INDU displayed. The fact that the 1477 level was taken out clearly removes the ABCDE triangle interpretation we thought was forming (see yesterday's charts). And so far at least the wave form is not complete enough to give us a sense of a high probability, good risk/reward trade here.

Like the SPX and INDU, the NDX's impulsive wave down from the open doesn't count "complete" yet. On a short term chart we can see 4 waves clearly with the internal 4th wave ending at about 3:35 ET yesterday, the third wave ending at 1469.88, right above the 1469.57 low after the breakaway gap on 4/2. A new low beneath 1469.88 will make this move from yesterday's gap open high a clean 5 wave impulsive move. That said, the move from yesterday's high can also be counted as an ABC decline, with the C leg of that decline ending where the "3" leg ended. That would be the bullish way to "label" the move from an Elliott wave perspective.

What is interesting from a Fibonacci standpoint about this 1-2-3-4 or A-B-C wave pattern is that waves 1 and 3 (or A and C) are almost exactly equal: 18.5 points and 18.3 points respectively. Why is that important? Corrective ABC declines often sport C legs that are equal in length to A legs. IF this is merely a corrective ABC decline from the gap opening high yesterday, then, so far at least, the A leg and the C leg are the same AND if prices don't go to new lows beneath 1469.88 in today's session, we would have to entertain the bullish interpretation that yesterday's down move was only a correction and that a new impulsive move up was imminent.

However, there are times when, in impulsive waves, wave 1 and wave 3 are equal. This happens when wave 5 is extended (meaning larger than both wave 3 or wave 1). In impulsive moves where wave 5 is extended, that wave 5 is often 1.618 times the length of wave 1 or wave 3. In this case, since wave 3 and wave 1 were both roughly 18 points, that would make wave 5 (if this move does extend lower in today's session) roughly 30 points down. Why do we bring this up? Because if prices do dip below 1469.88 today and wave 5 "extends", the next support level implied by the end of the extended 5th wave is 1447/48. The 1448 area is only 5 NDX points lower than the 1453 gap that remains open from the 4/2 gap open in the NDX. So there again, there are a few reasons to believe that should prices break below 1469 in any meaningful way, prices could head quickly toward 1453 at a minimum.

Dow Jones Industrials (INDU)

The INDU gapped to an open high and fell just like the SPX through several important support areas, ending at 10380 but testing 10362 at the intraday low. Like the SPX, the drop in the INDU does not yet count a complete 5 waves down from the AM high. Another new low beneath 10362 would do just that; leave a clear 5 wave impulsive move down from the AM highs. What interpretation that clean 5 wave down move holds is open to a few interpretations; like the SPX, much depends on what happens in the next few sessions.

10350 is an important support area for a number of reasons. If the move up from the 3/24 lows was indeed a new impulsive move to higher prices for the year, then prices should soon find support around the 10350 area, which is the 38.2% retrace of the entire move up from 3/24 to 4/6, and move impulsively higher. In other words, if the move down from the 4/6 highs was just an ABC correction, then the C wave should just about be complete (lower near 10350) and should then move impulsively higher. For the bullish case to gain more traction after today's action, prices should soon (next few sessions) find support and move higher signaling a resumption of the uptrend from 3/24.

If prices do go below 10362 today and then bounce but look corrective and remain below 10445 and absolutely below 10475, and then fall away and break through support at 10295, then the intermediate term bearish case will gain much traction and will become our preferred interpretation. We'll simply have to see how prices react over the next few sessions to determine the intermediate term picture. For now the very short term does not hold clarity: the impulsive move down doesn't look complete but could be with a small move under 10362. To the degree that a bounce develops from the 10350 level we'll have to gauge on an intraday basis the likelihood of it continuing higher past 10445 resistance or if that price will cap it and start the next leg down. Stay tuned.

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