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Advanced Technical Analysis

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Note: the following analysis is formulated as an assimilation of Fibonacci, DeMark, and other technical indicators. It is offered as education and not intended as advice in any way.


Summary:


We had been looking for prices to correct in yesterday's session to the SPX 1127/31 and NDX 1470 area to correct the impulse wave up from the 4/21 lows. Those supports did not hold and instead prices move decidedly lower on heavy volume, very negative breadth, and extreme down vs up volume. Yesterday's action forces us to alter the working Elliott wave interpretation. We now see two setups as currently operative: (1) a bullish 4th wave triangle (an ABCDE pattern with each leg being a "3" wave pattern) that started at the March highs and is near the end of the final E wave at around these prices. Under this interpretation, prices should move impulsively higher from here above the 4/5 highs at least. Or (2) the scenario in which a very bearish wave (II) top was registered at the 4/5 highs, with prices moving steadily lower from here on out. Confirmation of this 4/5 wave (II) highs count would come if prices exceeded the lows set on 4/21 in all the indices and would be very bearish indeed.

So those are the current parameters for the intermediate term trend: if prices find support in this area (give or take a few SPX points) and move impulsively higher, we can reasonably expect the bullish 4th wave triangle interpretation to be valid and at least new highs above the 4/5 highs to be seen if not new annual highs. If prices take out the nearby 4/21 lows, this triangle count is invalid and something much more bearish (but currently unclear) is afoot, and prices should then move decidedly lower. At this stage the E wave of the bullish triangle is getting very near completion; a marginal new low beneath yesterday's intraday lows should just about complete the pattern if it is valid. Otherwise, if prices cannot find support, SPX 1116, NDX 1440 and INDU 10280 and fall through our stops and then through the 4/21 lows, the outlook becomes very bearish.



Highlights:


S&P 500 (SPX)


Yesterday saw the SPX correct much more than we thought it would (below 1127/29), which causes us to reassess our Elliott wave count to two possibilities which we describe below. Market internals confirmed the weakness: advance decline at -1818 was a recent high, volume expanded significantly (1.86B and highest since March 11th), and down vs up volume was a strong 7.2:1, also a recent extreme. So how does yesterday's action fit in with the longer term trend possibilities? There are two (main) ways to interpret yesterday's action: one bullish, one bearish.

The first technical interpretation is the more bullish intermediate term. We are reviving the 4th wave triangle count that we had as operative (see the 4/22/04 research note). This count, which is bullish in the intermediate term, has an ABCDE 4th wave corrective triangle forming from the March highs in all the indices, with the A leg from the March highs to the 3/24 lows, the B leg the 3/24 to 4/5 wave, the C leg the 4/5 high to the 4/21 wave low, and the D leg the 4/21 lows to this Monday's highs. The E wave then, has been playing out from Monday's high, taking a 3 wave form and, if this count is valid, should just about be completed in the SPX 1120 area (+/- 1 pt) if it hasn't already been completed at yesterday's low. Channel trendlines, short term momentum non-confirmations, some Demark trend exhaustion indicators, and Fibonacci relationships all point to this 1120 area being a good place for prices to find support and move higher impulsively (see charts below). A move lower through the 1116 4/21 lows would invalidate this bullish triangle scenario and cause us to step aside and reassess the intermediate term trend.

The second, much more bearish interpretation is that the 4/5 highs represented a wave (II) high of the developing impulsive decline that started at the annual highs in March. Today's move lower would have been the start of an aggressive move lower in wave (iii) of wave (III) toward new lows below the 3/24 lows. There are a number of technical reasons this interpretation is unwieldy and improbable, which we have discussed before, but if prices do take out the 4/21 lows, we must then begin to give this interpretation credence. It would be very bearish on the intermediate term and suggest that the 3/24 lows would be taken out on the downside in relatively short order.

No conservative outlook can be made at this juncture until we can, as before, confidently see that the E leg of this 4th wave triangle has ended. Prices today should help us determine that: if they come under the 1120 area in any real manner (and certainly below the 1116 4/21 lows) then the triangle pattern will be invalid. If however, they can find support in the 1120 area, and move impulsively above 1130, then we will be able to look for prices to move above the 4/5 highs in short order. Beneath 1116 the intermediate term trend is bearish. An impulsive move above 1130 that finds support first in the 1120/21 area will be considered bullish.

We'll have to play it by ear for the next few sessions in terms of the intermediate term trend. It is still possible that a new high above the 4/5 highs fails, but for now the setup is either higher through 1130 or lower through 1116. We'll know more about the intermediate term trend once one of those price points are taken out.


The Nasdaq 100 (NDX)


Just like the SPX, the NDX fell through our cited potential support level of 1470ish and we are now forced to alter our technical interpretation to the same as the SPX above: either a bullish 4th wave triangle is underway from the January highs, the E wave of which will stay above the 4/21 lows and move decidedly higher or a bearish wave (II) high was struck at the 4/5 highs and a bearish wave (III) down is underway toward new lows beneath the 3/24 lows.

The parameters then are these: if the bullish 4th wave triangle is operative, prices should find a good low today (this AM) in the 1447/1449 area and then move decidedly higher in an impulsive (5-wave) fashion that exceeds both 1466 and 1475. Eventual new highs above the 4/5 highs and quite possibly to new annual highs would then become probable. Channel trendlines, short term momentum non-confirmations, some Demark trend exhaustion indicators, and Fibonacci relationships all point to this 1447/49 area being a good place for prices to find support (if they haven't already) and move higher impulsively. If, however, the bearish wave (II) high was indeed struck on 4/5, then this wave (III) down will not find support in the 1447 area, will move lower through first 1440 and then the 1435 4/21 lows.

The intermediate term trend then, for now, rests on the key levels of 1435 (bearish below) and the 1447/49 area (if it holds, bullish above). It is still possible that a new high can be struck above the 4/5 highs and that prices then turn back down, but for now the bullish setup calls for either new highs above the 4/5 highs or new low beneath the 1435 lows. How prices act in the next session will help us determine which of the above interpretations is most probable.


Dow Jones Industrials (INDU)


The INDU and the SPX are tracing out the same pattern: either the bullish ABCDE triangle from the March highs will complete soon at or near the 10300-330 area or prices will move below the 10250 4/21 lows. For now the weight of the Demark, momentum, channel trendline and wave count indicators suggest that the Wave E low will be struck in this area. But should prices not break decisively above 10400 soon and instead move lower than 10300, the bearish interpretation that a wave (II) high was struck on 4/5 becomes operative. Such a bearish interpretation would have ramifications toward the 3/24 lows and lower.

Like the SPX, no conservative trade recommendations can be made at this juncture until we can confidently see that the E leg of this 4th wave triangle has ended. Prices today should help us determine that: if they come under the 10300 area in any real manner (and certainly below the 10250 4/21 lows) then the triangle pattern will be invalid. If however, they can find support in the 10320 (+/-) area, and move impulsively above 10400, then we will be able to look for prices to move above the 4/5 highs in short order.

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