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Advanced Technical Analysis

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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.

Summary:


Yesterday's impulsive move down below the important 3/24 lows in all indices but the NDX, was confirmed by market internals (down vs. up volume, ticks, breadth, volatility, etc.) as well as momentum. Indeed, even the small degree 5-wave move from the 5/4 highs does not appear complete (let alone the impulse move off the 4/26 highs). Once again breadth was a negative record: at -2750, it was better by only 174 net issues over the Friday record. So momentum, the wave pattern, and internals all suggest that the decline in the very near term is not yet over. How this impulsive move down fits into the larger trend picture is not exactly clear but it is reasonable to conclude that the bearish wave (III) interpretation we have been following is not the most probable scenario (though it still has its sticking points).

The SOX, the Nasdaq Composite, the INDU, and the SPX have all moved below their 3/24 lows; the NDX will likely do so imminently. Our intraday note yesterday cited SPX 1174ish, INDU 9824ish, and NDX 1317 as reasonable first targets for the impulse that started back on 4/27. Should prices not be held at those supports (and the bearish wave (III) down interpretation suggests they will not, SPX 1030/40, INDU 9400-9600, and NDX 1200ish are the next layer of large degree Fibonacci support. The bearish wave (III) down interpretation remains problematic for us for a host of the reasons we laid out in yesterday's note. But prices continue to fall and market internals are horrible, so we must respect the possibility that those much lower targets might be seen. We present below another near term bearish scenario that is less bearish than the wave (III), but it is not more attractive a conclusion than the wave (III) interpretation. For now, the path of least resistance seems to the downside until at least the lower supports are seen and/or significant positive non confirmations are seen in breadth, ticks, momentum, etc. that may give this market confidence that a bounce is likely. The very short term interpretation suggests that yesterday's bounce is an internal 4th wave off the 5/7 highs that will result in lower prices for all three indices. How much lower and from where a bounce will occur (if one does imminently) will help us understand just how bearish an interpretation is justified. For now however, the analysis suggests to be suspect of all ABC rallies for lower prices. The most likely interpretation then is for the bearish wave (III) down to have started at the 4/5 highs and calls for much lower prices before any wave (IV) rally occurs.


Highlights:


S&P 500 (SPX)


The impulse move down from Friday continued yesterday with prices moving well below the 1100 mark and breaking through the 3/24 lows. You'll recall that yesterday's note suggested that any price movement below the 1103.60 area would invalidate the 4th wave bullish triangle count we had been following. Yesterday's move lower to 1079, impulsive and confirmed by market internals, effectively eliminates the bullish 4th wave triangle interpretation. Now all but the NDX has moved below the 3/24 lows.

Remarkably, breadth yesterday was only marginally better than the Friday record, so internals continue to suggest this impulsive move down has room to go before it's complete. Hourly momentum indicators too are now confirming the down move and the hourly Demark trend exhaustion indicators are not yet near a trend exhaustion point. Finally, the very near term wave count is open to multiple interpretations but the current move down that started on 5/4 counts best as a 3rd wave down from the impulse down that started on 4/27. This means that once we get hourly non confirmations of new price lows, we'll then be looking for a 4th wave bounce to phi resistance within the impulse that started on 4/27. And then we'll attempt to find a good low at even lower prices from which to anticipate some degree of rally.

How the current bearish impulse wave down "fits" into the intermediate term trend is not precisely clear and is open to some interpretation. We have shared with you our previous concerns over the very bearish wave (III) down interpretation. The overlap in prices on the SPX from the 3/5 highs to the 3/24 lows and then back to the 4/27 highs made this ultra-bearish interpretation a low probability call. In fact, just to give you a sense of how low probability the call was, the expanding wedge pattern from 4/6 to 4/21 would need to be labeled as "wave i" of the ensuing wave (III). Expanding wedges are so rare that, among seasoned Elliott wave practitioners, it has only been seen twice in the recorded price history of the stock market. So to label it as the beginning impulse wave down in a larger wave (III) was an extraordinarily improbable interpretation.

Nevertheless, we must respect both the price action and the internals of the market here, and both are suggesting that the impulse down we are now witnessing is in fact a "three" of some degree given the severity of its internals. Other than the very bearish wave (III) interpretation, a simple zig zag could be unfolding from the 3/5 highs: each wave would be equal (a common relationship) at SPX 1074.40. But for plenty of similar reasons, this interpretation does not "count" well either, as both the A wave (3/5 to 3/24) and the C wave (4/6 to present) are not cleanly "5"s down. As well, the wave pattern off the 4/27 highs does not count complete, suggesting that it is unreasonable to expect 1074 to stem the decline. Another less bearish interpretation would be a double zig-zag (labeled W-X-Y) where both the W wave (again 3/5 to 3/24) and the Y wave (again 4/6 to present) are three wave patterns. Here too equality would put the Y wave end at 1074.40. The difficulty of this interpretation, other than the fact that the Y wave does not yet count complete, is that it does not fit the INDU well at all.

Based on the above, you can see that getting a clear picture on the intermediate term trend remains problematic. There are a few things we know however: (1) the market internals are very characteristic of a larger degree 3rd wave, (2) important Fibonacci price supports have given way impulsively making any bullish interpretation low probability, and (3) the very near term Elliott wave form as well as market internals call for even lower prices before any larger degree of bounce can be expected. All of the above points more strongly to a bearish wave (III) interpretation than either the less bearish ones or the now-discredited bullish one. For now we will tentatively conclude that the bearish wave (III) down scenario is unfolding: it calls for substantial new lows beneath the 3/24 lows before it completes. The next best alternative for the SPX is some sort of double zig-zag correction that could - could - bottom in the 1070/75 area but more likely would do so in the 1030/40 area.

The next important support level for the SPX is 1074. Assuming our current wave interpretation is correct (that we're in at least a wave (iii) down from the 4/27 peaks), then lower supports in the SPX 1030/40 are likely to be seen before we get any of the substantial non-confirmations that would indicate the possibility of a meaningful bounce.

We are cognizant of the climactic-type action in breadth and down vs. up volume in these last few sessions and it must be respected. But the break of important Fibonacci supports as well as the wave interpretation suggest lower prices are in order before a material bounce develops.



The Nasdaq 100 (NDX)


The NDX too broke away to the downside impulsively, moving below the important 1390 level (barely) before bouncing in what looks like an internal 4th wave bounce from the impulse that started on 5/7. Once again, the tech sector outperformed the SPX and INDU; the SOX itself was actually positive on the day up 0.4%. How this tech out performance fits into the larger degree trend we do not yet know. It could possibly be that the NDX and SOX, having declined much more than the SPX and INDU, are consolidating while the latter two indices play catch-up.

The trend however in the NDX does remain down as at least one more new low beneath the 1390 area is needed to complete the impulse move down from the 5/7 session if not the larger degree impulse that started on 4/26. Hourly momentum indicators, unlike the SPX and INDU, are not confirming the new price lows (yet) that yesterday's session registered in the NDX and the Nasdaq composite (CCMP).

Despite these momentum non confirmations on the hourly charts, the NDX does not count a complete 5 wave move from the 4/27 highs. Though the very short term wave count is somewhat muddy (owing to some overlap yesterday with the 5/6 lows), the next layer of Fibonacci support does not come in until 1317. How the Elliott waves, Demark indicators, and momentum measures act on their way to that high probability target is difficult to ascertain right now. For now, none of the significant technical non confirmations are in place nor does the current wave count as complete, suggesting that the 1317 area is an important magnet for this index sooner rather than later.

Like the SPX, it is possible that a double zig zag is taking shape (labeled W-X-Y) from the January highs, with the W wave from 1/20 to 3/23, the X wave from 3/23 to 4/5, and the Y wave from 4/5 to present. For many of the same reasons as the SPX, this count too has many flaws (for one the Nasdaq Composite does not count well with this interpretation). Indeed, the W-X-Y count has more flaws it would seem than the very bearish wave (III) down interpretation. Unless prices find solid support at the 1317 area (where the Y wave would be equal to the W wave), we should assume that the bearish wave (III) down is operative.


As with the SPX, we are cognizant of the climactic-type action in breadth and down vs. up volume in these last few sessions. Tight stops must be set on all positions to account for any reflex rally that might present itself. However, the break of important Fibonacci supports as well as the wave interpretation suggest lower prices are in order before a material bounce develops.


Dow Jones Industrials (INDU)


The same comments for the INDU as the SPX. Important Fibonacci supports have given way, breadth, ticks, up vs down volume, Demark trend exhaustion indicators, and volatility have all confirmed these new lows. Most importantly, the wave pattern does not yet count complete from either the 5/4 impulse wave start OR the 4/27 impulse wave start. Both have several more down up sequences to go that should target at least 9825ish before an expected bounce worth playing presents itself. For now, the analysis suggests to be suspect of any rallies that are corrective (an overlapping, 3-wave form) for a move to our cited lower support level with a higher probability target in the 9400-9600 area.

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