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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.


All three indices turned down impulsively and with strong momentum and confirming internals so there is no reason to believe this impulsive leg down is near completion. The SPX and INDU turned down at important resistance targets while the NDX did so slightly above the target resistances we had been looking for. Nonetheless, NDX prices seemed to have turned down impulsively and do not seem near a trade-able bounce yet. For all three indices there are two Elliott wave interpretations of the recent price action: both are near term bearish, but one is intermediate term bullish calling for new annual highs to be made after several more weeks of sideways action.

The other interpretation is decidedly more bearish and suggests that the top of the entire corrective rally from October 2002 is finished and prices will move decidedly lower over the next several months and quarters. At this stage we cannot yet confidently state which interpretation is most probable. If the less bearish interpretation is operative, a large 4th wave triangle is taking shape from the 2004 highs that should find support above the 3/24 lows in the next several sessions and will result in a few more weeks of choppy sideways action that ultimately resolves with prices making new highs in all three indices. If the more bearish interpretation is correct, prices should slice through the 3/24 lows in the next handful of sessions to confirm this more bearish interpretation.


S&P 500 (SPX)

Prices finally broke away from 1137/38 resistance impulsively yesterday, signaling the start of the next impulsive leg down in the SPX toward at least the 1109-1112 area and quite possibly below the 1087 3/24 lows.

Momentum, ticks, advance/decline and volume all confirmed the impulsive move down today, so there is little reason to expect this decline to stop soon. The hourly demark indicators are nowhere near a trend exhaustion point and daily momentum is rolling over as well. Too, there is little to add to our working Elliott wave count: there are two interpretations of the last several weeks' move and both are near term bearish.

The first near term bearish, intermediate term bullish interpretation suggests that a large 4th wave triangle is forming from the 1163 highs (recall that triangles take a 5 wave ABCDE form with each of those legs tracing out a "3" wave pattern). The A leg of that potential triangle was from the 3/5 1163 high to the 3/24 1087 lows, the B leg of that triangle from those same 3/24 lows to the 4/5 highs, and the C leg forming now. Within triangles, phi-relationships often dominate as a relationship between adjacent legs. As a result, we can expect the adjacent legs of the triangle (in this case the A:C relationship, the B:D relationship, and the C:E relationship) to be related by phi or 0.618. If this triangle is forming, then the C leg that we are currently in should be about 47 SPX points, which is 61.8% of the 76 A wave points from the 3/5 top to the 3/24 lows. A few points above or below 47 should pretty much do it if this triangle interpretation is operative. This suggests that the SPX needs to find support in the 1100-1110 area to make this triangle count operative. A failure to hold 1100 and certainly to hold the 3/24 lows of 1087 would shift our focus to the much more bearish interpretation, described below.

What is that very bearish intermediate term interpretation? That the 1163 top was the top of the corrective rebound from the October 2002 lows, that the move from 1163 to 1102 on 3/16 was wave (I), the move up to 1150 on 4/5 was wave (II) and prices are now in a decline that will take prices eventually to 1027 before we can expect a multi-week bounce in wave (IV). A move below 1087 would make this more bearish intermediate term interpretation the most probable of the ones we are currently monitoring. But as we have said before, we need not make that call today. Both of the two most probable scenarios we describe above call for SPX prices to move the 1100-1110 area. As prices approach that support zone, we will be in a better position to determine if a bounce is likely or if the bear market has resumed in earnest. But we must caution bullish portfolio managers: today's decline (it's momentum and speed as well as a lack of a fundamental "catalyst") adds considerable weight to this more bearish interpretation of the market's intermediate term trend.

The next support zone is in the 1100-1110 area. Prices should not rise above 1127/29 if the move to 1100-1110 is underway, so we would use those as an area to re-evaluate the cautious stance.

The Nasdaq 100 (NDX)

The NDX, like the SPX and INDU, has clearly reasserted itself to the downside with an impulsive move off the 1479 projection we had highlighted in yesterday's note. In that piece, we had said that, despite the weak technicals of the move, we had to respect the potentially bullish scenario unfolding if prices hit 1478/79 and then fell but found support in the 1460/67 area. Well, the 1479 projection was hit but prices easily sliced right through the 1467 and 1460 supports, suggesting that the entire move off the 4/16 lows was indeed just a three-wave corrective movement. As of the close of the market yesterday, the NDX was already below the 4/16 1440 lows. In 2 ½ hours the NDX lost all of the points it had gained in the last 2 ½ days. That is the very definition of impulsive.

Yesterday we had stated that the intemediate term picture was unclear. What we said we did know was this: the move up from the 3/24 lows to the 4/5 highs was a corrective pattern (an "ABC" 3 wave pattern). We also said that neither the Elliott wave pattern nor the Demark or momentum indicators we use suggested that the move down from the 4/5 highs was complete. At this stage, just like the SPX, it is possible to see two most probable scenarios unfolding, both of which, like the SPX are bearish in the near term, one of which (like the SPX) is very bearish in the intermediate term.

The near term bearish but intermediate term bullish way to interpret our technical indicators is thus: just like the SPX, a large 4th wave triangle could be playing out from the January 20th 1559 highs; the 3-wave A leg of which traced out from 1/20 to 3/24, the B leg of which traced out from 3/24 to 4/5, and the C leg portion of which is now tracing out. This C leg should stop somewhere above the 3/24 lows of 1368 in order to remain a valid Elliott wave interpretation of a 4th wave triangle. If (and it remains a decided if) this is a large triangle tracing out, the current C wave should take a 3-wave form and should be "about" 61.8% of the size of the A leg (the wave from 1/20 to 3/24 which carried 118 points). That gives a potential target for this C leg at 1435 +/-, which is 73 points (61.8% of the 118 point A wave) lower than the B wave top at 1508. Well, already, the NDX is at this projection, as prices closed at 1436.90 yesterday. So already this interpretation is getting strained. Especially because the current impulsive leg down from the 1479 highs is not yet complete as it needs at least one more up-down sequence to complete a "5" wave impulsive move off of yesterday's peak at 1479. The C:A relationships need not be exactly 61.8%, so we must give some room to this interpretation. Within the potential C wave that is unfolding from the 1508 highs, its C leg would be equal to its A leg at 1411. So that too is a possible support target. The important part of this near term bearish but intermediate term bullish interpretation is that prices should find support well above the 1368 March 24th lows and should do so in the next few sessions of trade. Any move below 1400 will likely make us abandon this interpretation of the Elliott wave pattern.

The bearish interpretation of the technical indicators we use counts the Elliott wave pattern thusly: the move from the 4/5 highs to the 4/16 lows counts as a "5" wave impulsive move that carried 68 points for a wave I down. The last two days' advance came within 3 points of the 61.8% resistance level at 1482 and did so in a clear 3 wave form: this would be wave ii. The wave unfolding now would be wave iii that would be expected to carry at least 1.618 times the length of wave i or 1.618*68 points = 110 points down from wave ii. That would give a tentative target for wave iii of 1370ish. So there is your difference between the full-blown bearish scenario and the less bearish scenario described in the paragraph above. If prices find support in the 1400-1420 zone and bounce impulsively, then we can tentatively conclude that the move down from the 1508 highs is a three-wave move and that a large 4th wave triangle off the 1559 peak is taking form that will need a smaller up-down sequence before completing and seeing the NDX spike to new highs above 1559. If prices do not hold 1400 and instead move directly to the 1370 area, we would have to conclude that the triangle interpretation is incorrect and that the intermediate term trend is bearish and that the top seen in January is the end of the correction that started from October 2002.

It's very early to be making such a brazen call, so we will not do so. Just know that today's decline has many of the ear marks of the start of a 3rd wave and not a C wave which suggests that the more bearish interpretation might be operative. We'll have a better sense of that once we see how the NDX reacts at lower prices.

Dow Jones Industrials (INDU)

The INDU technical pattern is the same as the SPX above: a new high above 10460 was registered and prices turned away impulsively from the 10487. Like the SPX, this index is in the early stages it seems of this impulse down from 10487 that does not, even if the intermediate term bullish case is operative, count complete.

Just like the SPX, there are two Elliott wave interpretations: a large 4th wave triangle may be forming that ends in the 10100-10250 area (and absolutely above the 10007 3/24 lows). We should be able to refine our target more in the next few sessions. In the INDU, this 4th wave triangle count is less probable because the initial wave down from the 2/19 highs counts as a clean "5" instead of a "3" wave pattern like the SPX shows.

The second interpretation is the more bearish, like the SPX: the 2/19 to 3/24 lows was wave i, the ABC rebound to 4/6 was wave ii, and we are currently experiencing the wave iii down from the 10570 highs on 4/6. If this interpretation is correct, prices in this wave iii should carry to around 9300/9400 in the next several weeks. That's a remarkably aggressive forecast, we know, so we will simply take it one day at a time and let the weight of the evidence (bearish or bullish) force us to one probability or the next. For now, the near term support where some degree of bounce can be expected if this bearish interpretation is correct is in the 10085/10110 area.

In the interests of education, I wanted to share the following insight: In a research note yesterday, we had suggested that traders keep an eye on the 10480 level. The INDU got up to 10487 intraday before reversing course abruptly. This is a good example upon which to speak about soft vs. hard stops. Yesterday's INDU was above our cited 10480 stop by 7 points (.07%) for precisely 15 minutes of a 6 ½ hour trading day. Strictly speaking, adhering to the discipline of exact stops would have potentially stopped out a short position in this index if a trader adhered to the 10480 stop. We wrote that "only a move above 10480 would cause us to abandon this bearish view" in yesterday's research note. We should be more precise and say that "only a move that moves above 10480 impulsively and stays above 10480 would cause us to abandon this bearish view." Our larger point is this: the Fibonacci support and resistance targets that we try to identify are really soft targets that traders should use in the context of the larger pattern. A few points above or below (or a few minutes above or below) do not alter the larger bearish or bullish pattern that is developing. Please understand that our Fibonacci targets are soft and have, to use a decidedly technical term: wiggle room.

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