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Advanced Technical Analysis


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


An AM bounce gave way to afternoon selling on Friday, with the INDU and the SPX leading the way down (again) while the NDX outperformed. The most notable technical observation about Friday's action was the remarkable breadth. At -2880, there are only three days that have registered a worse advance/decline going back to the mid 1980's: March 8th 1996, and on 10/16/87 and 10/19/87, the latter two days being the day before and the day of the October 1987 crash. As we have been saying for the last two months, the internal health of the market is clearly degrading, despite the fact that prices are a mere 5.6% off their annual peaks. Breadth is but one of the technical indicators we use, so we cannot conclude that the bearish wave (III) down scenario is operative based solely on breadth. Hourly Demarks are not yet registering trend exhaustion indicators (suggesting the downtrend has not completed, but the new price lows on Friday were not being confirmed by momentum measures at 34 minute charts or greater, suggesting a bottoming process could be underway. As for the Elliott wave pattern, both the bearish wave (III) down interpretation and the bullish 4th wave triangle pattern remain valid. To be fair, the break of support at SPX 1103.60 tilts the odds in favor of the bearish wave (III) scenario (the INDU and NDX did not break their same Fibonacci supports at 10108 and 1390 however).

All-in, the technical landscape has presented us with a plethora of data that supports the bearish wave (III) interpretation as well as the bullish 4th wave triangle interpretation. Only a move below the 3/24 lows in the indices (which the SOX has already completed) would allow us to confidently eliminate the bullish 4th wave triangle scenario. In the meantime, hourly momentum is not confirming the new price lows but breadth, ticks, and down vs. up volume are. The very short term suggests that a completed 5 waves down may have finished at Friday's low and possibly a larger degree "5" from Tuesday's highs as well. As before, we'll simply have to attempt to trade a shorter time horizon until the larger degree trend (multi-week) clears itself up. A move below the 3/24 lows would eliminate the bullish 4th wave triangle interpretation. A move above Friday's highs would resurrect it. For now those are the boundaries between the bull and bear cases.


S&P 500 (SPX)

4 days of overlapped price action gave way to an impulsive move below the 1103.60 support area on absolutely terrible (in fact record-breaking) breadth and confirmed by ticks and down vs up volume. So prices are within wave (III) to well below the 3/24 lows, right? Perhaps, but there are a few data points that might suggest otherwise. First, hourly and 34 minute momentum is not confirming these new lows. Second, the wave pattern off the 4/27 top could be considered complete (with some nice internal symmetry) at or near this SPX 1098 area, thereby potentially completing the C leg of the 4th wave triangle count we have been following. As we have stated, we can only eliminate the bullish 4th wave triangle scenario with a move below the 3/24 lows. Though with every point below the C leg Fibonacci projection at 1103.60, the 4th wave triangle scenario weakens further. So for the 4th wave triangle scenario to have any merit whatsoever, it needs to move impulsively higher from this area and do so relatively soon (next few sessions).

The hourly Demark trend exhaustion indicators we use are currently not yet indicating a trend exhaustion signal, giving merit to the bearish case. Another 3 hours of trading (lower) could set off one such trend exhaustion indicator but for now the Demarks are not providing any good signals for a near-term bottom.

The question for traders is: are prices on the verge of breaking down hard in a wave (III) well below the 1087 lows or are they ready to turn up in the next leg of a triangle correction from the annual highs. The difficulty with the wave (III) scenario we have is that wave (III)s tend to be violent, somewhat unexpected, and remarkably swift in their descents. The technical conditions for a major wave (III) decline (such that would be expected for the bearish case to be operative right here) are nowhere near ideal. Prices have been under pressure for the most part for the last 22 days; daily ROC or MACD indicators are nowhere near overbought (to say nothing about the hourlies which are clearly oversold); the tech sector has been outperforming, and the price action since the 4/5 highs has been very much overlapped. If a violent, abrupt, and painful wave (III) down was about to kick off, we would have much more confidence in that assertion if we were overbought on hourly indicators, near overbought on daily (at least not already below the "0" line), prices weren't down for much of the past 3 weeks of trading, techs were undergoing a bloodbath, and the price action was not so overlapped in wave (III)'s beginning stages.

We cannot dismiss the price action however: supports have not held, breadth is terrible, the VXO is confirming the price lows, and some momentum measures are confirming the decline. Alas, however, only a move below the 3/24 lows would allow us to dismiss these "worries" and thus the bullish 4th wave triangle interpretation and settle on the more bearish interpretation.

All of the above is to say that the technical picture remains mixed: the techs (and especially the SOX) are outperforming but the SPX and INDU have (or are about to) breach important Fibonacci supports, momentum is not confirming the new price lows but other indicators are, the Demarks are in a downtrend and not yet signaling trend exhaustion, and the Elliott wave pattern has been highly overlapped for much of the past week and has not broken above (1120) or below (1087) important resistances or supports enough to generate a confident trend call.

The Nasdaq 100 (NDX)

The most notable feature of the market these last few days has been the out performance of the NDX and specifically the SOX. Breadth on the NDX was not nearly as poor as the NYSE: at -1430, it was even better than Thursday, providing a positive non confirmation as Friday's prices approached the Thursday lows. NDX volume too contracted, providing another non confirmation. From an Elliott wave pattern standpoint, the NDX is still within the 35 point range that defined last week's trade and is even more overlapped than either the SPX or the INDU. Overlapped price action does not make us confident about the bearish wave (III) scenario we have been following, but neither does it allow us to confidently state that the bullish 4th wave triangle interpretation is operative. For now, only a move below the 3/24 lows would eliminate the 4th wave triangle scenario and only an impulsive move above 1435 would allow us to eliminate the bearish wave (III) scenario.

Hourly Demark trend exhaustion indicators are not showing any good setup at this stage bullish or bearish. Momentum (21 min, 34 min, and hourly) is decidedly not confirming the move to lower prices on Friday. So the positive nonconfirmations here in the NDX are more numerous and stronger than those in the SPX and INDU.

For all the reasons we stated in the SPX analysis above, we believe the bearish wave (III) scenario is a weak (low confidence) call, but even more so in the NDX as it has already been weaker than the SPX and INDU. However, in the final analysis we must respect the price action. If prices meaningfully take out 1390, the bullish 4th wave triangle scenario will be weakened considerably. A move below the 3/24 lows (as the SOX already did), would eliminate the bullish 4th wave scenario altogether.

A move below 1385/90 in a meaningful fashion and certainly below the 3/24 lows of 1368 would be very bearish. A low found in the 1385/90 area or above and then a move above the 1435 area would resurrect the bullish 4th wave triangle scenario. We will await one of the moves to establish a confident picture of the near and intermediate term trend in the NDX.

Dow Jones Industrials (INDU)

Mostly the same comments for the INDU as the SPX. Lots of cross currents technically make a confident notion on the intermediate term impossible. For every point below 10108, the bullish 4th wave triangle count gets weakened considerably. A move below the 10007 3/24 lows eliminates it altogether and calls for meaningfully lower prices. Only a move above 10250 and then 10350 would allow us to become confident in the bullish 4th wave triangle scenario.
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