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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 new swing high in all three indices leaves a clean 5-wave advance from the 4/21 lows. This new high then suggests that the most probable intermediate term scenario can be reduced to two likelihoods: one very bullish that calls for eventual new annual highs in the next few weeks, the other very bearish calling for an eventual sharp and decisive decline below the 3/24 lows. We were looking for a clean ABC, 3-wave decline to lower phi support in all three indices once those 5 waves up were complete. Yesterday prices did correct, and bounced (in the INDU and NDX) from just above the minimum 38.2% retrace target we were looking for and did so in an apparent 3 wave fashion. The SPX penetrated this level 1134 by a scant 1.07 points. So the correction is over right? Whether this is "enough" of a correction is impossible to say at this juncture, but the pieces are in place that would suggest the correction is over.

However, none of the Demark or momentum confirmations of a trade-able bottom were registered at the afternoon lows; in addition, if the 5th wave triangle interpretation is operative (the bullish one), a reasonable expectation is to see the ABC correction go deeper into the support zone less than the 38.2% support level: 50% or 61.8% are much more probable in 5th wave triangles. Both Fibonacci price and time relationships would be better served with prices moving a touch lower for a touch longer: SPX 1127-1130, INDU 10350-10380, and NDX 1460-1467. Only a move above SPX 1140, INDU 10480, and NDX 1490 would cause us to believe the correction is over; until then, we remain unconvinced and look for a better setup at slightly lower prices to have a more confident view of the near term. It is best to let more of the technical indicators develop until we get a better sense of the ABC decline's finish for a more confident view. As we have stated: it will be the next impulsive, 5-wave move up once the ABC correction is over that will help us understand the intermediate term trend: whether bullish or bearish.


Highlights:


S&P 500 (SPX)


Yesterday the SPX put in a new swing high at 1145 before falling away in a three-wave form to 1 point below the 38.2% support level (at 1132.91). A late day bounce then took prices back to the 1135 level at the close while, in the futures market, the SPX continued on toward 1138. Breadth was in-line with prices (-872 net) as were ticks (lower) and down vs. up volume (2:1 down vs up).

So, is the ABC correction that we envisioned complete? Though the bare minimum retracement was registered with the spike below the 38.2% support level, none of the short term Demark or momentum indicators we use were suggesting that yesterday's afternoon low was the end of the ABC decline. As well, if our bullish 5th wave triangle scenario is playing out (and it now looks like that is a more viable scenario), Elliott wave formation rules suggest that a deeper than ordinary (38.2%) correction would be expected: 50% or 61.8% corrections would be the more probable expectation. Those levels are still a touch lower in the SPX: 1131 and 1127 respectively. We have also found that, in addition to price, time also tends to be corrected in a phi-based manner in corrections. Specifically: the 4/21 impulse move up lasted 18.5 trading hours. A bare minimum 38.2% "time" correction would make the ABC correction last until 10:30 am ET today (the 50% time correction would be 12:30 pm ET today and the 61.8% would be 2:45 pm ET today). So net/net, we remain unconvinced that the ABC decline is over: both time and price would be better aligned with Fibonacci relationships to the 4/21 impulse by correcting slightly lower (1127-1130) sometime by the end of trading today (possibly tomorrow). We'll hope to see both momentum non-confirmations of that low and some degree of Demark trend exhaustion indicators. If those line up, we'll have a more confident view and a better grasp of the risk/reward. What would make us think the ABC decline had already ended with the low yesterday? A clean, impulsive move up past 1140 would force us to acknowledge the fact that the ABC decline was probably over. Consumer confidence comes out today at 10 am ET, so perhaps the reaction to that data will provide the necessary catalyst we are looking for one way or another.

As we have said, the manner and extent of the next impulse leg higher (after we can confidently state that the ABC decline is over) will provide important evidence as to what degree of trend is being established on the intermediate (multi-week) term. One is very bullish with new annual highs shortly, the other is very bearish with slight new swing highs and then a fast and hard break lower. Time and prices will hopefully provide us with clarity.


The Nasdaq 100 (NDX)


The NDX has traced out the same pattern from the 4/21 lows as the SPX: yesterday's new swing high resulted in prices correcting meaningfully. The move lower stayed just above the 38.2% support zone of 1474 by hitting 1474.79 briefly before moving higher into the close (and higher still in the futures market).

As with the SPX, we do not have a confident call on whether the afternoon lows were the end of the expected ABC decline. Fibonacci time and price relationships would be better served by prices moving a touch lower (1459-1467 area) for a touch longer (in today's session sometime, possibly tomorrow's). We must note that prices did move down in a three-wave corrective fashion off the highs, so all the basic rules have been met from an Elliott wave perspective, but as with the SPX, the momentum and Demark indicators were not suggesting an end to this ABC decline (nor were the time relationships we highlighted above). So for now we should allow for a slightly deeper pullback before becoming confident that the ABC decline is complete. Only a move impulsively above 1490 would force us to acknowledge that the ABC decline could be over and the next impulsive leg up underway.

Relative to the intermediate term, the manner and extent of the next impulse leg higher in the NDX (after we can confidently state that the ABC decline is over) will provide important evidence as to what degree of trend is being established on the intermediate (multi-week) term. One is very bullish with new annual highs shortly, the other is very bearish with slight new swing highs and then a fast and hard break lower


Dow Jones Industrials (INDU)


Same call on the INDU as the SPX but even more so, as the INDU has corrected even less than the SPX or the NDX. A cleaner move toward 10350/380 in today's (or perhaps tomorrow's) session would better serve Fibonacci relationships. Only a move above 10480 would cause us to think the ABC decline was over. Otherwise, we will look to evaluate near our lower supports if we can more confidently state the ABC decline is likely complete.

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