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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:


Prices gapped higher on Friday moving through all of the important Fibonacci resistance points we had been highlighting: 1140 in the SPX, 10469 in the INDU and 1461 in the NDX. On its face this action gives rise to serious doubts about the bearish expectation that we had been holding for imminent new lows beneath the swing lows of two weeks ago. Despite this longer term unclear Elliott interpretation, the short term still shows an overbought condition with divergences in momentum and breadth as well as existing Demark trend exhaustion signals. Though we cannot make a confident case for either an eventual decline or an eventual move to new highs, the very near term finds prices continuing to be ripe for a fall. At times like these when the technical indicators we use are not signaling a confident call in either direction, all we can do is remain patient and wait for the next move in any direction - either impulsive in a 5 wave form or corrective in a "three" - and let the indicators line up for a good risk/reward. At this point, we do not see such a setup, but we will highlight it here as soon as our indicators suggest as much.

Highlights:

S&P 500 (SPX)

Prices gapped above the 1140 important resistance level on the employment data and so doing made the intermediate term picture far less clear from a technical perspective. Though the price action remains unconfirmed by momentum (and breadth) and is thus ripe for at least some sort of 3 wave pullback, when precisely that will occur now that Fibonacci resistance has been penetrated, is unclear. We have found that strong uptrends tend to diminish the importance of momentum non-confirmations, so at this stage we will not rest expectations for a pullback (even shallow) on momentum alone but rather our Elliott wave, Demark and momentum indicators. Given the impulsive-looking nature of the prices since the 1087 low and the 3 wave "look" to the decline from the 1163 high to that 1087 low, a legitimate case can be made that eventual new highs above 1163 will be in the offing. Unfortunately, a bearish case can be made (though that case gets weaker every day prices stay above 1130).

There is little to add to our momentum and Demark indicators from last Friday: they remain far closer to a very near term top than a bottom, so chasing this move with a long trade seems like - in the least - a risky proposition right here. What degree of trend change might take place on a pullback is impossible to determine at this stage given the resistance levels cited above have been penetrated, so we'll simply have to let the market set up our indicators for either a long or short trade that has good risk/reward characteristics. IF prices are set for even a small pullback, a small 5 wave decline on the intraday (5 minute chart) should be seen first. If that happens, we'll then be able to determine just what kind of minimum correction to expect in the SPX.

The Nasdaq 100 (NDX)

The important 1461 point we had been discussing was soundly penetrated in the NDX, suggesting, at the least, expectations for a move to new lows soon are unrealistic. Despite the non-confirmations of momentum for the last several sessions, prices continue to advance suggesting that this move is quite impulsive. On its face, the price action of the last several days suggests eventual new highs above the January high of 1559 are possible, since the move from 1559 to the 1368 low has a 3 wave structure. Hampering such a bullish call is the fact that the internal Elliott wave count from the move off last week's 1368 low is not very clear (that is, where prices are within the internal wave count). As such, it remains difficult to know when or where this advance might stop and correct itself to some degree. As a result, we'll simply have to wait for, like the SPX, our indicators to line up to make a more definitive call.

Dow Jones Industrials (INDU)

The 10469 level on the INDU was penetrated on Friday, suggesting that, for this index too, the imminent bear case cannot be made with conviction. Of all the indices we are following, the INDU remains the most bearish "looking" from an Elliott perspective, insofar as it clearly has a 5 wave structure from its 10753 high to its 10007 low. As with all Elliott interpretations, we could "force" a 3 wave form onto this pattern, but it would be a low confidence "count", making it less probable. Nevertheless, we must respect the 3 wave top to bottom structure in the SPX and the very impulsive action in the NDX as possibly indicating that the DOW may eventually move to new highs as well.

As with both the SPX and NDX it remains difficult to determine where in the wave count prices are from the 10007 low and therefore difficult to determine where and when this advance might correct. It remains much closer to a trend change of some degree than to a continuation of this advance given the momentum non-confirmations and the Demark trend exhaustion indicators that triggered late last week. For now, no good risk / reward setup presents itself. Should the indicators converge on such a trade, we'll highlight it here.

No charts today since the count remains unclear; please see charts from our Wednesday conference call note for the possible bullish and bearish longer term Elliott wave counts. We will publish new charts once the near term wave count clears itself up and we can make a more confident assessment.

No positions in stocks mentioned.

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