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.
Given the gap up this AM we wanted to lay out both the bull and bear case for the NDX specifically as it remains the lowest confidence call of the three major indices. Even with today's advance in the INDU and SPX, those two indices still count very well as corrective 4th waves that could move to lower levels beneath the last swing lows and toward SPX 1068-1072 and INDU 9770-9824 before another bounce is likely. Last night we highlighted the trend channel in the NDX and suggested that it too remains in a corrective advance that will see new lows. While that view is still very much a possibility, we lay out below the other (bullish) scenario that could be playing out and try to correlate those scenarios with the expected action in the SPX and INDU.
The Nasdaq 100 (NDX)
Today's gap up makes two opening gaps up in a row for the NDX, an occurrence we haven't seen in at least the last 2 months. Prima facie, that's a bullish (read: impulsive) event, right? Well, possibly. Below we lay out the reasons for the bearish interpretation that calls for prices to find new swing lows before embarking on a more meaningful bounce that relieves the oversold daily condition of prices. And we also lay out the bullish interpretation that may be operative given the strong two day advance we've seen.
The bearish interpretation, which we have been highlighting of late, suggests that prices are still in the impulsive wave down that started on 4/5/04 and have not yet found a solid bottom. We have suggested that the technical conditions are ripe for an end to that impulse wave down insofar as daily oversold conditions exist and that some momentum non-confirmations are present on hourly charts for the NDX. These suggest that we are closer to a bottom than a top. However, the wave pattern along with the Demark indicators we watch, remain key and on that score, as we have been making clear, are mixed, especially with the last two days' gap up openings.
However, the bearish interpretation suggests that some degree of 4th wave corrective "flat" (labeled ABC) has been forming from the 5/12 lows, which is nearing an end as I write in a C wave from the 5/17 lows. Hourly stochastics, MACD, and ROC indicators are all overbought enough to be indicative of a 4th wave bounce ending in this area. If the ABC flat has been forming off the 5/12 lows, with the C wave of that pattern starting at the 5/17 lows, we'll need to see a clean "5" waves up from the 5/17 lows in order to determine if the C wave has ended (recall that in ABC flats, the A and C waves trace out 5 waves within their structure while the B wave traces out three waves within its structure). So, can we see 5 waves up from the 5/17 lows? As the chart below (13 mins) shows, it is possible to count a completed 3rd wave from the 5/17 lows but only another down-up sequence to slight new highs would complete a full "5". A down-up sequence would also allow a short term non-confirmation of a new high in MACD and ROC. Currently, the momentum profile is confirming the price highs this AM, which is indicative of a possible 3rd wave high. A pullback and then another push to slight new highs would probably produce momentum non-confirmations suggesting that the full "5" waves in C are complete from the 5/17 lows.
The pattern in the SPX and INDU, which remain corrective looking on both shorter time scales and the larger scale from the 4/26 highs, suggests that another leg down is needed in those indices to complete a "5" wave impulse move. Given the near term bearish interpretation for SPX/INDU, the above bearish interpretation of the NDX is much more reasonable than if the SPX was not in a bearish pattern. And we have found that when the three markets' technical conclusions align with each other, the confidence in that conclusion being correct increases materially. It would be an improbable conclusion to suggest that the NDX is in a distinctly bullish position to move to new highs while the INDU and SPX conclusion is that they will move to new swing lows.
What would cause us to become more confident in this bearish interpretation for the NDX? Prices need to find a top near the 1428-1432 area, turn down impulsively and move below Fibonacci support in the 1408-1396 area (filling those two gaps) and then move below 1380. Meanwhile, the SPX and INDU need to complete their corrective bounces higher soon as well (they are currently near their respective resistances for this bounce).
The bullish interpretation of the NDX pattern suggests that, if a complete 5 wave pattern off the 5/17 lows is seen, instead of it being the C wave of an ABC flat correction, it may be interpreted as the wave i up of a new impulse move that should carry eventually to well above 1450. And once this wave i up is complete, prices should find solid support in the 38.2-61.8% Fibonacci support area and then start a new impulsive move higher toward that upper initial target of 1450+. The SPX and INDU as well will need to largely confirm that an important bottom has taken shape to have confidence in this NDX interpretation: they need to move up impulsively from here and not show any overlap in prices (as they clearly have over the last 5 sessions).
In conclusion, the 2 gaps up in the last two sessions for the NDX can be interpreted in either a bullish or a bearish way. Neither however, are high confidence views. The bearish interpretation is that a complete "5" wave impulse move off the 5/17 lows will complete soon with one more down up sequence. This will then lead to an impulsive move toward the 3/24 lows at 1368. This interpretation is bolstered by the bearish probable pattern in the SPX and INDU but is made unclear by the fact that momentum is confirming this recent new high and that a nearly complete "5" can be counted from the 5/17 lows. The bullish interpretation will see a complete "5" wave impulse move off the 5/17 lows as the wave i start of a new impulse wave higher that should carry well above 1450. The very short term pattern off the 5/17 lows is evidence that this might be the case, but the SPX and INDU pattern are casting doubt on that conclusion.
Keep one eye on the SPX and INDU indices while the other is on the NDX; we're at a key level right now for whether a good bottom was put in or not in the last few days.
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