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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.


Yesterday morning saw the indices all trade above their Monday AM highs yesterday, suggesting that the ABC low we were looking for had ended at Monday's afternoon lows. But prices retreated impulsively from those 10 AM ET highs, suggesting that, in fact the ABC correction we were looking for continues. In yesterday's note, we stated that Fibonacci relationships would be better served with prices a touch lower than Monday's intraday low. So far, it looks like that setup will form at slightly lower prices than yesterday's close. Ideal support levels for this correction remain: SPX 1127-1131, INDU 10385-10420 and NDX 1460-1467. We will look for momentum non-confirmations at new lows, Demark trend exhaustion indicators, and a clean 5 wave move down from yesterday's high in order to gain comfort that the ABC correction of the impulse move that started on 4/21 is complete. Once we get that confidence, we may have a good setup for a potential move to new highs above the 4/5 highs at a minimum.

There are alternate scenarios at this juncture (the rare expanding wedge wave (ii) count from 4/5 to 4/21) that call for a sizable decline from here. But the technical backdrop does not yet support this low probability call. For now, we wait for comfort that the ABC decline has ended: we will consider exposure once the cited technical conditions are met. And as we have repeated, it is the size, manner, and make-up of the next impulsive move higher above the 4/5 highs that will tell us much about the intermediate term trend: the bullish (new annual highs) and bearish (a failure below the year's highs and a sharp move down) are both still operative for now.


S&P 500 (SPX)

The SPX moved up in what, at first, seemed like an impulsive move off of Monday's late PM lows, making new highs above Monday's intraday high. This early AM action suggested that the ABC decline we were looking for to correct the impulse wave off the 4/21 lows had in fact completed at Monday's late afternoon lows. However, prices then moved decidedly lower from the 10 am ET highs and took out, albeit briefly, the important 1138 support zone. So what does this price action suggest for the near term?

Two possibilities emerge: (1) that the correction we were hoping to see enter the SPX 1127-1131 zone is still underway, and is tracing out an expanded flat correction (expanded flats take the form of an ABC where the B leg is larger than the A leg and the C leg is approximately 1.618* the A leg). If so, we can expect prices in today's session to find support in the 1127/1129 area (which is the 61.8% and 50% support zone for the 4/21 impulse wave higher) before we can conclude that the larger 3-day correction is over. This interpretation is our preferred one for a number of reasons: the C leg of this expanded flat (the C leg started at yesterday's high) will count "well" with a new low beneath 1132.91; the Demark indicators do not suggest yet that this trend off the 1146.84 high is yet complete, and momentum measures were confirming the afternoon lows: all suggest that one more leg lower is needed to complete the correction. Under this interpretation, several Fibonacci projections for support enter in the 1127/29 area as well, which is the 61.8% and 50% retracement respectively of the 4/21 impulse wave up. That would be an ideal setup for the corrective action we have been looking for.

The second possibility is this: that the ABC decline did in fact end at Monday's low (1132.91) and we are currently in the wave (iii) impulse higher, with the first impulsive wave of this larger wave (iii) up ending at the 10 am ET highs yesterday and then a minute wave (ii) correction taking prices down to 1136.54 afternoon lows. Why is this conclusion unsatisfactory? Because the afternoon move lower retraced more than 61.8% of the supposed minor wave (i) up from the 1132.91 lows to the 1146.84 highs. If this were in fact the start of the wave (iii) up (as would need be the case in this interpretation), then such a deep retracement would be very rare indeed (especially in a developing wave (iii) which tend to be very strong and impulsive). As well, this interpretation does not fit well with the NDX and Nasdaq comp correction that seems to be unfolding (see below for details); the expanded flat wave (ii) correction at the 1127-1129 area fits the NDX and Nasdaq comp more closely.

Today's session will tell us which of the above are unfolding: if prices fall through 1135, then the expanded flat wave (ii) correction is operative that calls for a good low to be formed in the 1127/29 area. If prices continue to stay above the 1136 area, then the ABC correction probably ended on Monday's 1132.91 low and we can expect prices to start a sustained and durable move higher above the 4/5 highs soon. Hopefully today will provide the needed evidence.

No clear path can be made at this juncture until we can confidently see a completed ABC correction of the impulsive wave that started on 4/21 and ended at Monday's AM gap high. Once we can ID the end of that correction, we'll be able to position for a potential move to above the 4/5 highs. The parameters we would ideally like to see are these: prices decline today to the 1127/29 area, find support, show momentum non confirmations and Demark trend exhaustion indicators (21 or 34 minute charts). Key support remains in the 1127/29 area (with 1123 an area to re-evaluate) and if it holds we could see a potential move above the 4/5 highs at least and possibly to new annual highs in the next few weeks.

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 allow us to position ourselves accordingly.

The Nasdaq 100 (NDX)

Unlike the SPX and INDU, the NDX did not make a new swing high yesterday above Monday's AM high, so in this index the interpretation that the ABC correction is still ongoing is more confident. The corrective pattern here however is a double zig-zag (two ABC, 3-wave, zig zags together) where by the first ABC correction was the Monday high to Monday low move, followed by a 3-wave corrective move from the Monday low to Tuesday high, then the second zig zag now playing out, with the final leg down tomorrow to the 1470 region. This would be the ideal setup for this corrective move to take as it would fulfill not only several Fibonacci relationships within its own wave structure, it would correct the impulse wave up from 4/21 to just below the 38.2% support level at 1474.50, a natural support level. We would hope to see momentum non-confirmations of the down move, some nice breadth improvement, as well as some short term Demark trend exhaustion signals (the 34 minute chart looks like it could register a Demark trend exhaustion signal in the first few hours of trading today).

There are other less probable interpretations of this corrective move but they remain obscure and low probability unless prices break down today and go below 1460 in a meaningful way. The other (less probable) scenario is that the 1476.42 low seen yesterday afternoon was the end of a wave C of a contracting ABCDE triangle. If our main interpretation is correct however, those two probabilities will not play out and our corrective double zig-zag will: a low today that finds support in the 1470 area (+/- 1 pt) should complete it and lead to a move above the 4/5 highs (1508) at least in the NDX and quite possibly much more depending on what the intermediate term trend turns out to be. How far the impulse move carries above the 4/5 highs will tell us much about the intermediate term trend. At this juncture, it looks entirely bullish for new annual highs. But we must reserve judgment until we see the next impulse move up.

If the double zig zag correction is in fact taking place, we may see prices to find support around 1470 today and then for another impulsive wave up to start from there. We will look then for momentum non confirmations of any new lows seen below 1474 as well as the requisite Demark trend exhaustion indicators. If those technical conditions occur, we will attempt to relay that action in an intraday note as a positive condition. 1460 is an area to re-evaluate if we can identify support in the 1470 area and the above technical conditions present themselves. It's a touch early to make a prediction that the 1470 area will stop a decline but it remains the most probable setup. Stay tuned.

As we have been reiterating, 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, hopefully toady) 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 (and it is now the more probable setup), the other is very bearish with slight new swing highs (above 4/5 highs) and then a fast and hard break lower.

Dow Jones Industrials (INDU)

The INDU and the SPX are tracing out the same pattern: an expanded flat correction that should take prices below Monday's low of 10418 into the lower support zone of 10360-10400. If an expanded flat correction is playing out, the C leg should find support in the 10385 area (+/- 10 points) ideally, as this is the point at which the C wave would be equal to 1.618 the A wave. As well 10385 is just above the 50% retracement support area at 10381.

If we are wrong about the expanded flat correction playing out and instead the expected ABC decline ended at Monday's lows, then prices should not decline much more than they already have (ideally staying above the 10468 area) and should proceed in a sharp wave (iii) thrust higher to above the 4/6 highs (10570). The other possibilty is that 5 wave sup in an impulse off the 4/21 lows ended yesterday at the AM high and that a larger multi-day ABC correction will take prices lower for the next few days (but still staying above 10360). The setup in the INDU is less clear than the SPX and still less clear than the NDX.

The above parameters could well present themselves today: if so, watch the action around support in the 10360-10400 area (ideally 10385). However, the NDX and SPX are in a cleaner position at this point, and the analysis suggests better risk/reward setups than the INDU at the end of this corrective decline. In the INDU, we would keep an eye on the 10360 as a sign of further weakness.

No positions in stocks mentioned.

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