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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:


Friday's intraday low in the markets count best as a completed internal 4th wave correction of the impulse wave that started at Wednesday's lows (see charts below, which is the same for all three indices). Prices overlapped significantly on the pullback Friday, adding weight to this assessment. The price action that followed from the Friday afternoon lows was overlapping too; this suggests that the current small wave up from the Friday afternoon lows is an ending 5th wave triangle, which further bolsters the case that the Friday AM to afternoon lows action was a 4th wave correction. A slight new high in today's session will complete the 5th wave of this larger impulse wave up that started on 4/21. A subsequent decline that lasts a session or three and takes prices to lower phi support should then take place. The manner and extent of this decline will provide important evidence as to what degree of trend is being established in the intermediate term. We maintain the three intermediate term possibilities that we presented in Friday's AM note; prices over the next handful of sessions should tip the probability toward one of them.

Highlights:



S&P 500 (SPX)


Friday's intraday low in the SPX counts best as a completed internal 4th wave correction of the impulse wave that started at Wednesday's lows (see charts below). Prices overlapped significantly on the pullback Friday, adding weight to this assessment. The price action that followed from the Friday afternoon lows was overlapping too; this suggests that the current small wave up from the Friday afternoon lows is an ending 5th wave triangle, which further bolsters the case that the Friday AM to afternoon lows action was a 4th wave correction. A slight new high in today's session will complete the 5th wave of this larger impulse wave up that started on 4/21. A subsequent decline that lasts a session or three and takes prices to lower phi support should then take place. The manner and extent of this decline will provide important evidence as to what degree of trend is being established on the intermediate (multi-week) term.

For the short term, the cleanest way to count the price action from Friday's lows is as an ending 5th wave that will end at our above targets, will do so without momentum confirmation, and will ideally show some Demark trend exhaustion indicators on charts of 21 minutes or larger. So far, all the pieces are in place for those things to happen in today's session. Friday's breadth (-1265), and up/down volume ratio (0.60: 1) were much worse than Thursday's breadth (+1570) and up/down volume ratio (4:1), suggesting that the impulse that started off the Wednesday lows is waning and due for some sort of three-wave ABC correction that moves to lower phi support in the 1126-1134 area, with emphasis on the 1130 area in particular.

In Friday's AM note, we published three scenarios that were possible in the intermediate term. Once we see a clean 5 wave impulse move up (ideally at our above targets), we will need to see what type and size of ABC correction ensues - how far it drops (to the 38%, the 50%, or the 62% pullback levels), what kind of momentum confirmation and internals profile stocks are exhibiting, etc. Once we have that information, we will be in a better position to identify the intermediate term trend with a greater degree of confidence. For now though, there are several possibilities that are presented and choosing among them is a difficult task until we see how prices behave over the next few sessions.

Any moves today that do not put in a new high above Friday's intraday high would complicate matters further and suggest something quite rare took place over the last handful of sessions: an expanding wedge. It is so rare that it need not be described, but should prices not make a new high and therefore leave a "three" wave move off the 4/21 lows, and start a sizable and impulsive wave down today passing through phi support, it would be very bearish for the intermediate term. For now, we'll stick with the three scenarios we presented in Friday's AM note until a pattern emerges that suggests these three most probable are void.



The Nasdaq 100 (NDX)


The NDX has traced out the same pattern from the 4/21 lows as the SPX and the INDU, which strengthens the confidence we have in the very shot term call for some type of three wave correction starting today that leads to lower phi support. So with respect to the NDX, all of our comments regarding waning momentum and non-confirmation of a high today are equally valid. Prices in the NDX should see a new high above Friday's intraday high ideally in the 1502 area before falling away in a three-wave ABC correction that takes prices to lower phi support in the next few sessions: 1461-1477 is a good target for the support we envision if a simple zig-zag correction ensues over the next 1-3 sessions.

If the NDX does not make a new high in today's session (thereby leaving behind a corrective three-wave move up from the 4/21 lows) and then starts a new impulsive move down that falls through the 1460 area, then something much more bearish is going on and we'll need to reexamine the technical indicators in light of that action. Like the SPX, this type of action would reinvigorate the very bearish case that has been discredited with the last few days' price action. For now though, we'll simply have to stand by the three scenarios we laid out in Friday's note, with the two most likely calling for new highs for the year eventually being set in the next handful of weeks.


Dow Jones Industrials (INDU)


Precisely the same call for the INDU as the SPX: a new high above Friday's intraday high should take place today, ideally in the INDU 10510/520 area. Like the SPX, the INDU should show momentum nonconfirmations on this new high and should then correct to some lower phi support level: the 10350-10415 area is a high probability target. The depth and extent of this correction should tell us much about the intermediate term trend. And once armed with that information, we'll have a better sense of the next good trade opportunity in whatever direction the technical indicators suggest.

No positions in stocks mentioned.

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