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.
The bounce that took place last Tuesday was a remarkable head fake. What we thought would be a move to slight new highs simply collapsed and went to new lows, strongly suggesting that the next large impulsive decline that we were looking to identify was underway.
Yesterday's session saw all the hallmarks of the impulsive decline we were looking for: prices hit new multi-month lows, volume surged, down volume as a % of total volume surged, breadth confirmed, volatility confirmed, and momentum confirmed. All of these strongly suggest a 'kick-off' to the downside toward our next target level of DOW 9600, SPX 1130, and either NDX 1350 or NDX 1315.
Based on our bearish view, positioning for weakness on any bounces (or simply on today's open) appears the prudent approach (not advice), simply because the selling in this particular impulsive decline is expected to be steady and swift. Bounces should not materialize for more than 1-2 sessions and should be fairly weak affairs.
Based on our analysis, we are lowering our stops to the peaks from April 12th for each index. It is important not to reach for the cover trigger too soon in this particular decline: (1) the next layer of lower targets remains well below current prices and (2) the daily models we look to are nowhere near registering any sort of washout bottom (of any degree - intermediate or above). So we would resist the siren song of the bulls who are (already) calling for a washout, sentiment-induced bottom.
Our models suggest the decline is just getting started and that any such sentiment 'extremes' so observed by the sell-side could be just as faulty in their implication as those observed in 2003-2005 when bullish sentiment persistence recorded multi-year extremes. It is entirely reasonable to think that the same persistence could affect the bearish sentiment figures that are likely to be generated in the forthcoming decline.
Besides, sentiment is not a critical part of the complexity models we use; they are simply contextual indicators - like momentum. They help us feel more or less comfortable with our pattern, Fibonacci, and trend exhaustion indicator analysis; they do not act to form that opinion in the first place. Remember, we are 5-6% off the peak in the blue chips; the SPX and DOW haven't had a 10% correction in over 2 years.
We'll watch our hourly intraday patterns to make sure nothing more than a 1-2 session counter-trend bounce is taking place; if it does, we'll cover some up and wait for the next best entry point. Otherwise we'll let the bounces play for the 1-2 days they could and stick with (the hard won) trend.
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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