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Applied Complexity Analysis


Thx Scotto!


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

Despite the fact that Friday's DOW undercut its March 29th lows, our models continue to suggest that there is a high probability that Friday's price decline remains part of an ongoing, 8-14 day 300-400 bps bounce from the lows registered last Tuesday. Friday's lows in the DOW were unconfirmed by any other major index and certainly unconfirmed by ticks, breath, or momentum.

As our Friday note suggested, "counter-trend bounces, particularly wave 2's, are notoriously difficult to analyze as they play out. So we will simply have to use our broad price and time guides above for now and get more granular as we see the bounce unfold." At present there are several patterns that this counter-trend bounce can take from current prices, but the most logical is either a simple zigzag correction (with one more impulsive move up from around the current lows) or a double zigzag that could trace out several more 'up-down' sequences toward our price and time targets for this move.

At this stage it is too early to tell and indeed fruitless to attempt since neither the price nor time minimum retracements have been met for a bounce. As a result, looking for weakness from current prices does not constitute a good risk/reward scenario. Only a significant breakdown in prices (in all the major indices) OR a move into higher price and time targets would constitute a good risk/reward. We think patience is key for one of these scenarios to play out, clearly favoring a decided move up in the next handful of sessions.

As we said on Friday: "we continue to believe based on the behavior of counter-trend retracements since the 2000 peak, we think it is reasonable to expect a deep retracement of the 22 day 5%+ decline that we witnessed in March. And that means we should look for weakness toward the top of our stated price and time range: SPX 1189/1205, DOW 10620/770; NDX 1494/1517 and 8-14 days from March 29th (April 6th- 12th). It is even possible that the upper limit of expected price/time resistance is seen: SPX 1215, NDX 1532, and DOW 10860 and April 15th."

We have argued against trying to catch the long side and would be using a stop based on our analysis at Tuesday's lows for all the other indices and at DOW 10300. The DOW has a potential target of 10330 today where it could find a 'good' bottom from which to rally - not intended as advice - (in an expanded flat correction off the March 29th lows). We'll continue to look for the DOW to bounce this week from that price or higher while the rest of the indices do the same.

One of the reasons we think a bounce remains the highest probability is because some of the high beta indices we watch are set for a meaningful move up: the SOX in particular looks poised for a meaningful rally. And though we don't like to 'correlate' indices this way, the potential for a bounce in the higher risk sectors suggests an increased desire for risk (and thus buying) of stock in general, a strategy that should help the SPX, and DOW as well. For now, we think patience is prudent for our bearish analysis and smart risk management for our aggressive scenario for a move higher.

Please note: We are now able to offer our proprietary complexity model analysis on both stocks and/or stock indices as a daily service to institutional investors and a select number of individual investors. There are several different services available; each are provided on a monthly subscription basis and cover all U.S. indices and all U.S. stocks. Please contact us for details and rates.

No positions in stocks mentioned.

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