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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.


Thursday's new highs, just like Wednesday's, were both labored and came without any of the momentum confirmation that impulsive moves do. Again, the most probable Elliott wave count is not exactly clear (it can be considered complete with yesterday's high or could conceivably make one more new high), but the conditions are ripe for some sort of wave completion, the degree of which we will be able to determine in the next few sessions. Another Demark trend exhaustion signal was generated on the SPX hourly chart (as did both the NDX and the Nasdaq Composite) yesterday. Given this set of technical conditions, prices are "ripe" for a healthy move toward initial support zones in all three indices. As we have said repeatedly, it remains difficult to know exactly where we are in the ABC bounce scenario we have been calling for over the last week. If a move lower stops at phi support levels, it will be considered a B wave of that ABC bounce. If it slices through lower support, then we should entertain the idea that the entire ABC bounce we have been looking for is over. This AM's employment report should provide the catalyst for prices to move one way or another: either fail immediately signaling the start of the new trend down, or perhaps spike into slightly higher resistance and then fail. Either way, technical conditions are present for a healthy pullback soon in our opinion. And given the employment numbers and their importance to prevailing sentiment, we should know today how prices are going to play out here.


S&P 500 (SPX)

Prices moved up above the 1127-1130 resistance area yesterday to 1135.67, only a few points from the upper limit of resistance we have been eyeing at 1140. However, it has done so without any confirming momentum, suggesting that it is technically weak. As well, another Demark trend exhaustion signal was generated yesterday at the high, making the second one in three days. The Elliott pattern is taking the form of a diagonal, which is an ending pattern, which further signals that this trend up is set for a reversal. Importantly, the momentum of these new highs has been drifting lower since Monday, again arguing that this up move is getting susceptible to a healthy pullback if not new lows.

As we stated yesterday, it remains impossible to say with conviction whether the move up from the low has been either the ending C wave of the expected ABC bounce or is in fact just the A leg of that same expected pattern. Either way, the ingredients are set (a completed wave count, Demark buying exhaustion indicators, and momentum non-confirmation of recent price highs) for a trend change of some degree. How prices move into lower support at 1104-1114 will be an important tell as to whether the entire ABC bounce is over or if just the A leg of that bounce is complete.

Obviously, today's employment numbers are going to determine one way or another whether this move needs one more leg higher above 1135 or if yesterday saw the top of this move. Since we cannot know for sure how prices will react, traders will have to play it by ear based on how prices react to the employment news. Any move below 1130 but especially 1125 would be highly suggestive that the trend had changed to the downside, with expectations of at least a move toward 1105-1117 area if not lower. Again, it will be a matter of whether this leg down is the B wave or is the start of the next big leg down in the SPX. Otherwise, should prices spike higher, a top could be found between 1135 and 1140, before this ending diagonal pattern is expected to complete. We are neutral until a clear finish to this pattern is evident, which will come with either (1) a spike high between 1135-1140 and then an impulsive move lower or (2) an impulsive move lower through 1130 and then 1125.

The Nasdaq 100 (NDX)

Same commentary with respect to the NDX. Momentum hit a high on Monday and has been waning ever since. And like the SPX, an ending diagonal is taking shape in the NDX, suggesting that this index too is highly vulnerable to at least a healthy move down (see supports below) if not the resumption of the larger downtrend. An hourly Demark trend exhaustion indicator ticked intraday yesterday (as it did now twice in three days on the Nasdaq Composite), adding bearish weight to the Elliott and momentum indicators we use.

We still can't be clear right now whether this move lower will stop at the 1404-1423 support levels or go to entirely new lows in wave 5. Complicating the picture is the fact that the CCMP, as we stated in our intraday piece yesterday, has exceeded its wave 1 low with yesterday's price action, thus invalidating the 1-2-3-4 wave count we were following. So though the larger picture has taken a more cloudy view, the fact that the near term pattern is highly vulnerable to a trend change down means we'll have to asses the longer term bullish and bearish count once we see what kind of pullback occurs from around these levels.

As above, the employment news will color the day's trading and we'll simply have to react to prices as they occur. Given how vulnerable prices are for a trend change lower, our bias is clearly toward the downside here. If prices today move below 1445 and especially 1435 that would strongly suggest that the trend has changed toward initial support in the 1404-1423 area. However, if prices spike higher, a top of some degree would be expected to be found within the 1457-1465 area before this pattern completes itself. As with the SPX, traders will simply have to react to prices: given how much downside potential there is, there is no need to position ahead of time as we can still participate in the move toward 1404-1423 once a trend change is confirmed.

Dow Jones Industrials (INDU)

Same story on the INDU; see our commentary above for the SPX. All the ingredients have been in place for the last two sessions to signal an important trend change toward at least lower support in the 10160-10260 area. Like the SPX, it remains difficult to say whether the entire ABC bounce we have been waiting for is complete or if a move lower is simply the B wave portion of that ABC bounce. Given the employment news today, we'll simply have to wait to see if the diagonal that has developed here too is over or needs one more new high. Moving below 10340 and especially 10315 would strongly suggest the trend had changed to down with support lower. A spike higher however would need to find resistance in the 10419-10460 area and then turn impulsively lower to confirm that the uptrend had exhausted itself and lower prices could be expected in the next several sessions.

No positions in stocks mentioned.

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