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Advanced Technical Analysis

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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.




Summary:


Yesterday's substantial and abrupt spike upward at 10:30ET was as remarkable in its impulsiveness as the downtrend on Tuesday: 70% of the market's intraday gain came in one hour from 10:30-11:30ET. As we had written, the low registered on Wednesday was not confirmed by a host of our indicators and the Tuesday/Wednesday action was overlapping in a way that suggested the move off those Wednesday lows was corrective; our expectation then was for another impulsive leg lower to "complete" the move from the Tuesday highs. That analysis, though the most probable, was clearly wrong. The last three days' substantial, abrupt, and impulsive action both down and up, cloud the near term and intermediate term view substantially. Especially so because the market internals and momentum have confirmed both the upside and the downside moves this week. It matters little to our indicators what the "whys" are: short covering, buy programs, futures-lead buying, etc. Impulsive action no matter what the cause needs to be respected. As a result of the substantial crosscurrents, we will need more price action to determine just what type of trend is emerging in the market.

We simply do not see a good risk/reward on either side based on the indicators we use: establishing long positions with short term indicators so overbought would be risky, but shorting this strength would be equally so. We present three "counts" below as the most probable; prices over the next handful of sessions should tip the probability toward one of them. Because we cannot yet be confident of the trend, it best to simply stand aside and assemble more data from the Elliott wave, Demark, and momentum indicators we use to identify the next portion of the action.

Highlights:

S&P 500 (SPX)


Yesterday's spike upward in the broader market was as abrupt and impulsive as the spike downward that preceded it two days earlier, making for some very volatile trading. This week's up and down moves were both confirmed by momentum and internals, suggesting that the trend would continue in that direction. So far, that hasn't happened. Our Demark, momentum, and Elliott wave interpretation of the price action this week has kept us bearish given the confirmed impulsive move down that started on Tuesday. Up until now, we had been working with two scenarios: (1) a large, bullish, 4th wave triangle whose C wave would resolve above the 3/24 lows (our support target was 1108-1110) and finish with another up-down sequence within the range of the previous larger swing highs and lows and (2) a completed wave (II) at the 4/5 highs and the start of a potentially very bearish wave (III) down from the January highs. Yesterday's action forces us to consider a third, though it too remains a low confidence call at this stage: the entire decline from the March highs was a complete ABC correction, the wave from 3/24 to 4/5 a wave I up, the 4/5 to 4/21 move lower was wave II and we are now in a powerful wave III up to new highs. So how does yesterday's impulsive move up fit into those Elliott wave counts?

Via-a-vis the 4th wave triangle, we had noted before that within ABCDE triangles, phi relationships between adjacent legs often dominate. If the move off the annual highs is in fact a 4th wave triangle as we had labeled it (please see charts below), then the C leg that finished Wednesday for the SPX was 0.43 times the size of the A leg. While this is an "acceptable" relationship, we have found that, when our Demark and momentum indicators suggest a larger move down than the C wave low of 1116, a relationship closer to 0.618 is much more probable. Thus, that is why we had targeted the 1108-1111 region as a potential bounce point in yesterday's note; it would have been closer to a phi relationship to the A leg, would have likely not been confirmed by momentum, and would have had some nice Demark trend exhaustion indicators. Alas, it never happened, as prices found the 1116 area for support and rocketed higher.

Nevertheless, the 0.43 C:A relationship still works if this triangle is playing out. The next 3-wave leg up, labeled as D in our charts, should end below the C leg high of SPX 1150.57 in order for this triangle interpretation to be valid. Indeed, the movement off the 1116 low "looks" like a 3-wave ABC move into either yesterday's highs (1142.77) or one slightly above that point (1143/44). As well, if the SPX reverses from this point, that would make the D wave that formed yesterday precisely 0.45 the size of the B wave (again, see our labeling in the charts below), which, interestingly is the same as the C:A relationship. A reversal from this point that fell below support at 1130, would suggest that the E leg is playing out. The 3-wave E leg should then find good support in the 1118-1122 area before a much stronger and much more powerful impulse leg higher took the SPX to new highs for the year above 1163. This 4th wave triangle interpretation then rests on the following conditions: prices should not exceed the 1145 area by any substantial margin, a move back below 1130 must take place that finds support in the 1118-1122 area, and that move must be a 3-wave (ABC) form. If those things happen in the next handful of sessions, we will be able to more confidently state that the 4th wave triangle is operative and that new highs in the SPX will be forthcoming. We will then be able to position for the move.

The bearish interpretation we had been watching is still valid but is turning more complex if it is in fact still operative. You'll recall that this scenario called the entire move down from the March highs the wave I, the 3/24 to 4/5 move up a completed zig-zag wave II. Given today's action, it is impossible to count the 3/24-4/5 wave a completed zig-zag wave II. The only way to label this action now from the 3/24 lows is as a double zig-zag, which in effect is nothing more than two ABC zig-zag corrective patterns on top of each other separated by a small ABC corrective wave. Under this labeling, the 3/24 lows to the 4/5 highs would be the first ABC zig-zag, the 4/5 highs to the 4/21 lows would be the "x" or separating corrective wave, and prices started tracing out the final ABC zig-zag higher from the lows set on Wednesday. Within this final ABC upward zig-zag, the A leg should be just about complete with one more slight new high in the 1144/45 area before a corrective B leg lower unfolds that finds support in the 1130-1135 area. Once this B wave is complete, another impulsive wave higher above the 1150.57 high should commence that should end below the 1163 March annual high before turning back down in a violent wave III downward. The reason this scenario is not high confidence at this stage is that (1) double zig-zags aren't all that common and (2) the subsequent high above 1150.57 would be a very deep correction (>90%) of the wave I down that went from the 3/5 highs to the 3/24 lows. "Normal" corrections do not exceed the 61.8% retracement level (1140 in this count); rare is the retracement that even reaches the 78.6% level (1150 in this count). The SPX has already reached the 78.6% retracement with the move to the 4/5 highs. Rarer still is a wave II correction that exceeds the 90%, which, if a double zig-zag interpretation is operative, this one should. These are the reasons why the very bearish interpretation is becoming less and less viable.

The third interpretation that we must now keep in mind given yesterday's action is that the entire 3/5-3/24 move was a completed correction and that a new impulse wave of large degree has been tracing out from the 3/24 lows, with the start of the 3rd wave up having started at Wednesday's lows. The reason this interpretation is low confidence is that the move from the 3/24 lows to the 4/5 highs counts well and best as a 3 wave move (corrective and therefore against the major trend). Only if we "force" a 5 wave structure on the 3/24-4/5 wave would this interpretation be operative. As a 5 wave move, this 3/24-4/5 wave does not count well or cleanly at all. Only a move cleanly and impulsively above the 1150 highs in the next several sessions will force us to adopt this interpretation as the most probable.

Internals yesterday confirmed the price action: momentum was strong, advance/decline made new highs, and volume expanded to 1.8B shares, 20% higher than the last several days' average. Normally we would suggest these internals are harbingers of a continuation of the direction of trend, in this case up. But the same internals were confirming the moves to new lows just a few short days ago, so we cannot rely on these indicators alone. We must let prices, via the Elliott wave and Demark indicators, "tell" us where they are headed.

We have a conflicting crosscurrent at hand and the low confidence that we have in any of the three possible scenarios we laid out above. If the 4th wave triangle I is playing out, we will be able to go long at a wave E bottom in the 1118-1122 area, if a bearish double zig-zag is tracing out, we will be able to short a new high above 1150 that stays below 1163, and if the most bullish interpretation is operative, we will have plenty of points to capture on the long side as this wave III up takes prices to new highs in the next few sessions. Until we get a better setup that aligns our indicators for a better risk/reward (either way), we counsel caution on the SPX.


The Nasdaq 100 (NDX)


The pattern in the NDX can be counted in the same three ways as the SPX above: (1) a bullish 4th wave ABCDE triangle that is in the very late stages of its D wave up and needs an E wave down to complete before prices move to new highs for the year, (2) a bearish double zig-zag pattern that started on 3/24 that is tracing out the second zig-zag toward new highs above the 4/5 highs of 1508 but below the January 1559 highs, or (3) a very bullish new impulse wave III up that started at the lows on 3/24 that will rapidly move above the 1559 highs in the next few weeks.

For the same reasons as in the SPX, none of the above are high confidence calls yet owing to the many technical crosscurrents that the market has exhibited in the last few sessions; each interpretation has its weaknesses. More price action over the next few sessions might help us determine which is operative. For the 4th wave ABCDE triangle to be operative, a slight new high above yesterday's 1488.74 high would complete the D leg and the E leg should then fall toward the 1448-1455 area in an ABC 3 wave fashion over the next session or two. A powerful thrust up toward new highs (above 1559) would then commence in this triangle scenario. If the 3/24 lows were in fact a completed correction from the January highs, prices should be in a powerful wave III higher that should continue strongly upward over the next few weeks easily slicing through the resistance areas of 1508 and 1525 toward new highs. The bearish double zig-zag interpretation should see prices come down in the next session or two in a shallow B wave that finds support in the 1460-1470 area before heading back up toward important resistance in the 1420/25 area. That resistance area should then be the start of a rapid move down in wave III that would carry below the 3/24 lows.

Given our low confidence in the technical setup, no clear direction is presenting itself at this juncture. We will need to have a better sense of which of the three above interpretations are correct before proceeding with either a long trade or a short trade. Hopefully the next session or two will allow us to determine which scenario is operative and then attempt to target a good risk/reward in the direction of the major trend.


Dow Jones Industrials (INDU)

Same exact call in the INDU as the SPX. If the bullish 4th wave triangle is operative, prices should move down from around the current price area (or perhaps one more slight new high above 10496) in an E wave toward a support target of the 10300-10330 area. A powerful post triangle thrust could then occur that would take prices easily above the 10753 highs registered in February. If the bearish wave II double zig-zag is operative then prices should decline in a small degree B wave off a peak in the 10495/10505 area toward the 10360-10410 area before turning back up toward the 10590-10635 area to complete the C wave of the second zig-zag in the developing double zig-zag. If a very bullish wave III up from the 3/24 lows is in progress, prices should not correct much as they climb easily through resistances at 10570 and 10650 on toward new highs above 10753.

We'll have to wait to get a sense of which of the above 3 scenarios are unfolding. Once we do get a better read, we will attempt to determine a good risk/reward trade to take advantage of the prevailing major trend.

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