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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.


Tuesday's new INDU high was unconfirmed by the NDX and SPX, another market divergence to add to the growing list of non-confirmations that prices currently are exhibiting. Ticks, up/down volume, breadth, MACD, ROC: all are not confirming the price high on Tuesday for the INDU nor the only small pullback the SPX experienced. This while the NDX was down almost a full %. The Elliott wave interpretation remains somewhat unclear on the longer term (several weeks or longer) but is more clear on the short term: 5 waves up from the swing lows 2 weeks ago can be counted in each of the indices but given the refusal so far for prices to move down despite some signals that the market is getting vulnerable, it remains an open question as to whether that correction will take place soon and to what degree.

Hourly Demark trend exhaustion signals have been given, and price advances are not being confirmed by momentums so all the pieces are in place for some sort of correction. At the least this suggests caution until we can identify a clean 5 wave down move, which may happen today (AA reported and was down 4% in the aftermarket last night). If it does, we will highlight some attractive levels. As our intraday piece yesterday mentioned, any new NDX short positions, ideally put on in the 1498-1502 area for a move to initial support in the 1465-1475 area, should be stopped out at 1504 (not advice simply sharing the process). The SPX remains too unclear to offer a good risk/reward trade on either the long side or short side, so sticking to the INDU and the NDX makes more sense. The next several days price action will be important data points in developing a more confident view of the intermediate (multi-week) term.


S&P 500 (SPX)

Very little to add to yesterday's comments on the SPX: prices traded within a tight 7 point band and closed within that band, offering little new evidence (price-wise) to the existing Elliott wave interpretation. Market internals continued to weaken (ticks, advance/decline, momentum, etc.) despite the fact that prices basically "hung in there" meaning only that the market has become more narrow and ultimately more susceptible to a down move. As we stated yesterday, the persistence of the move up from two week's ago lows has surprised us and should be respected. In the least, this prices' strength adds considerable weight to the idea that this entire move up in indeed an impulsive one and that, once we get some sort of pullback, the most probable trade would be for new highs above the old swing high of 1163.

It remains possible (just not probable) that prices are still within a bearish wave 2 rebound but that interpretation will only gain weight with a sizable and quick decline below the 1130 area. For now, no good trade setup can be seen here based on our indicators: long positions are risky given the weakening internals and short positions may be premature given the lack of a 5 wave impulsive move down from the Monday high. For now we suggest traders eye the INDU and NDX for better clues about the market's near term fate.

The Nasdaq 100 (NDX)

The NDX declined 23 points from its Monday high before recovering to end down 15. The NDX's clear weakness vs either the SPX and the INDU add another divergence to our list. The move down from Monday's high could be counted as a small ABC pullback but it doesn't have any Fibonacci symmetry within the waves making that a low confidence count. That said, the wave structure from the 1368 lows can be counted as merely a third wave within a larger 5 wave impulsive move up meaning that prices could have only small pullbacks like we saw yesterday and continue higher in a choppy and halting fashion for several sessions until a complete 5 wave impulsive move can be seen off the 1368 lows. At this stage it remains difficult to make a confident case for being aggressively long or short until the wave structure and Demark/momentum indicators line up one way or another.

For active traders wanting to position for further weakness, as our AM intraday piece yesterday highlighted, we would become cautious at the NDX between 1498 and 1502 with stops at 1504. If traders want to play the long side it makes sense to use very tight stops on any new or existing long positions (no more than 10 NDX points) in case this up move weakens and corrects below 1485 (again not meant as advice).

Dow Jones Industrials (INDU)

Only the INDU made a new high today, which is an index divergence that should be respected. As a result, it remains that either the SPX or NDX are more prone to a decline of some degree. Alcoa, a DOW stock, reported last night after the close and missed estimates by 2 cents and the stock was down 4% in aftermarket trading. To the degree that AA acts as a catalyst for the correction we have been looking for, we would then be looking for a clear gap down and a three wave (ABC) overlapping bounce to sell short into with defined stops. That could happen this AM but we'll simply have to wait and see. Prices in the INDU (and the other indices for that matter) have been resilient despite the continuing weakness in the internals, so it simply will not be prudent to guess a top of some degree is in place: we should await confirmation with a clear 5 wave decline and then ABC bounce to consider selling into.

Longer term, the INDU remains the most bearish of the three indices but continued strength above the 10468 level (which is the 61.8% retrace level of the entire decline from 10753 to 10007) will weaken that bearish interpretation. It is still possible to see this advance from the 10007 low as simply a correction and the larger trend to be down but every day that prices remain at these levels, that scenario weakens. The bullish interpretation is that this advance is a new impulsive move up: if so, the best risk/reward long trade will come when this first impulsive move up from the 10007 mark corrects itself in an ABC fashion for several days into phi support. For now then, traders leaning to the side of caution should wait for a clean 5 wave impulsive move down to confirm that some degree of correction is upon us. For those wanting to be long this index, using stops no more than 50 DOW points below market is reasonable protection.

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