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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.


Both the SPX and INDU have either just ended, or should today, an upward correction as either a wave (iv) of the first (wave i) impulsive wave down from the 4/5 highs or the wave ii correction of a completed impulse wave i down that ended on 4/14. Either of these two most probable scenarios are bearish for new lows beneath SPX 1122 and INDU 10320; the first interpretation is less bearish and suggest prices could find a bottom in the SPX 1110-1115 area. The second interpretation is more bearish and suggests new lows in the 1080-1090 area minimum. Which of these two most probable scenarios plays out could be determined today: a new high above 1136.80 today suggests the more bearish of the two interpretations is underway. If no new highs above 1136.80 are seen today but prices fall through 1122 anyway, we tentatively conclude that 1110-1115 might hold this decline. Only if prices move decidedly (and impulsively) over SPX 1141 will that suggest our two bearish interpretations are wrong. The analysis suggests a potential move to at least 1110-1115 and possibly 1080-1090 over the next week or so with a move thru 1141 a reason for re-evaluation. In the INDU the analysis suggests a move beneath 10320 to the 10225-235 area with 10480 an inflection point.

The NDX's decline is more mature than either the SPX or INDU: we remain cautious on this index to the 1416-1421 area with stops at 1460. None of the indicators we follow are suggesting yet that this NDX decline is complete. Only an impulsive move above 1465 would cause us to step aside with a flat position and wait for our indicators to line up bearishly or bullishly. The intermediate term trend will become clearer depending on how and if prices decline into our cited support zones. This week's action should help clear up the intermediate term trend.


S&P 500 (SPX)

The most important technical observation about the last three days' price action is how overlapping it is. In Elliot wave terms, overlapping price action suggests that the move is corrective and therefore against the trend. As can be seen from the low seen on the morning of 4/14, the SPX has traced out a largely overlapping price structure, suggesting that the last three days move will be eventually retraced.

There are a number of ways to "count" the Elliott wave pattern from the low of 4/14, the more probable of them all suggest that the corrective price action for the last half of last week will be retraced in new lows beneath 1122 shortly. To wit: the AM gap lower on 4/14 was a wave (iii) bottom of the impulsive move down that started on 4/5 and either (1) the subsequent up/down/up/down/up affair from that point has been a 4th wave, expanding wedge (an "ABCDE" pattern)with each leg tracing out a "3" wave form and the "E" leg of that pattern having ended at Friday's 1136 high and the next (5th) leg down to new lows is underway or (2) the 4/14 bottom was wave (iii), the 4/14 intraday high was wave (iv), and the afternoon low of 1122.15 was the completing wave (v) of the first larger degree impulse move down from 4/5. If this later interpretation is correct, then the move off of that 1122.15 low is a wave ii, expanded flat correction (ABC form as always) that has traced out an A up, B down, and is in the final stages of the C leg up off the 1120.75 low.

Both of these interpretations call for eventual new lows beneath 1120 so it matters little to the near term which interpretation proves correct. How will we know which one is operative? If the 4th wave correction was an ABCDE expanded wedge then the leg off the Thursday low of 1120.75 needs to have a three-wave (corrective) form. So far, the pattern off the Thursday low is clearly a "3". So any new highs above Friday's intraday high of 1136.80 would make the move off the 1120.75 Thursday low a 5-wave impulsive move and suggest that this is a wave C (A waves and C waves in zig-zags and flats always take a 5 wave form). So if new highs happen today, then this wave is most probably a wave C that is in its 5th and final wave. This 5th wave of C high, based on internal Fibonacci projections, should be only slightly above the 1136.80 high registered on Friday: the 1136-1139 area should cap the move and start the next impulsive leg down below 1120.

Once we see what happens this AM, we'll have a better sense of whether this last 3 days' corrective action was a wave (iv) correction (implying the 1110-1115 area is the next important support) or this last three days' correction was a larger degree wave ii correction (implying that the wave iii down will move considerably lower than 1110.

Of course, there is a smaller probability that the entire move off the 4/5 highs is a completed correction: none of our Demark, momentum, or internals indicators suggest that this is anything but a low probability interpretation, but it may still be so. Only a move impulsively above 1139 would start to suggest this is more probable (and a move above 1141 would make it more concrete).

We have been writing for some days now that the next few days' price action is important to shedding light on the intermediate term (multi-week) trend. If prices do NOT reach a new high today above 1136.80, then the intermediate trend will remains a bit less clear, as that would suggest Friday's high ended a wave (iv) correction off the 4/5 highs. This is the less bearish of the two most likely interpretations, calling for a wave (v) low in the 1110-1115 area. What happens from that support point will then become critical to becoming more confident about the intermediate trend: a larger ABC correction could be forming that we simply cannot "see" yet. However, if prices do make a new high above 1136.80 and hold below 1141 before falling away toward lower prices, that would add considerable weight to the intermediate trend. It would imply that the entire move down from the 4/5 highs was a wave i, the move off the 4/14 lows a wave ii, and the next move down a wave iii that could travel at least 45 points.

So in addition to the next few hours price action providing a good risk/reward trade, the next few hours trading should provide us with more clues as to what the most likely intermediate term trend is: bullish to eventual new highs or very bearish suggesting the top has been seen for this market for quite some time.

The Nasdaq 100 (NDX)

The NDX remained locked in its downtrend on Friday, despite the bounce in the SPX and INDU. As we stated in Friday's note, the near term pattern does not yet look "complete" from an Elliott wave perspective nor has the Friday low come with any significant indication from our Demark trend exhaustion indicators nor our momentum measures that Friday's 1440.56 low was a "good" bottom of some important degree. So we remain in the bear camp with respect to the NDX: though it "looks" closer to a bottom than does either the SPX or the INDU, none of the indicators we look for to identify a trade-able bottom are yet present.

For the very near term trend, the high on Friday of 1460.39 counted well as an ABC correction off the 1440 lows. By our best interpretation, this high was a wave (iv) high within a larger degree wave iii down that started on 4/12 at 1502. That suggests that prices should not be in a wave (v) of wave iii down to below 1440 before we can expect another bounce that holds below the 1460 area (for the wave iv top of the entire impulse move down that started on 4/5) and then fall toward our 1416-1421 support zone.

There are a number of possible "counts" in the NDX for the intermediate term: its picture is less clear than either the SPX or the INDU. What we do know is that the move off the 3/24 lows looks best as a three-wave ABC correction. So that interpretation makes the 1508 top either a large degree wave 2 (and the next most devastating wave 3 down is underway well beneath the 1368 lows of 3/24) OR it makes the 1508 top a wave B of some sort of contracting larger degree wave 4 triangle that will have one more up-down sequence if prices can find support in the 1416-1421 area. We'll simply have to see what happens at that important support area to become more confident in the intermediate term trend.

Given the two most probable interpretations of the SPX and INDU, it's hard to imagine the NDX bouncing hard while the SPX and INDU fall away in another impulsive down leg of some degree. As a result of the bearish interpretation of the SPX AND the fact that we still cannot identify any sort of real bottom in the NDX that looks complete, we remain cautious on this index for a possible move toward 1416-1421.

Dow Jones Industrials (INDU)

The INDU technical pattern is the same as the SPX: both of the most probable interpretations are near term bearish to new lows beneath 10320. How much below that will depend, like the SPX, on whether a new high is seen today or not. If a new high is seen (which will be more bearish in the intermediate term), it should be held by 10465-10480. If no new high is seen, we still expect prices to move below 10320 in the next several sessions.

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