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Advanced Technical Analysis - SOX

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

Summary:


It has been several weeks since our last published technical note on the SOX index owing to the complexity of the price action in the intervening period. At this point however, we feel comfortable enough to post a technical conclusion to the mysterious action in the SOX since the January highs.

In past notes we have lamented that the SOX decline from the January highs has had both impulsive and corrective characteristics, making a multi-week call difficult to make for this index. Regular readers know that impulsive moves suggest a major trend change, while corrective moves (that is, an overlapping move) suggest the dominant trend is still in force.

For the SOX, the overlap between important swing highs and low points since the January highs has made us reticent to declare the dominant bullish trend complete off the October 2002 lows. That said, nothing in the pattern, until now, suggested that the correction off the January highs was complete. Until now.

Our best technical conclusion for the SOX is this: a double zig zag 4th wave correction is nearly complete off the January highs. The first zig-zag took place from the January highs to the March 22nd lows, was followed by a corrective bounce from 3/22 to 4/6 and the second ABC zig zag has been unfolding from the 4/6 highs. Of this last zig-zag (from the 4/6 highs), the A wave down took place from the 4/6 highs to the 5/3 lows and a B wave corrective (overlapping) bounce is taking prices higher in an overlapping pattern that should soon (next week or so) be complete. The forthcoming C wave is likely to take prices down to multiple Fibonacci and Demark projections in the 410-415 area sometime near the end of July or early August.

If those prices provide important support, I expect the SOX to find a major bottom and climb to new annual highs above the January high of 560.68. Initial projections for a 5th wave top in the SOX is, as incredible as this may sound at this time, in the 620-640 range, or some 50%higher. If the 410 level does not provide support, prices could decline substantially from there.

Any move above 500 would reset the technical indicators and cause me to stand aside. If the 410-415 level provides solid support, that would be extremely bullish.

The parallel trendlines in the weekly chart are classic for an impulse wave off the October 2002 bottom. Interestingly, the lower trendline (connecting wave II bottom and the potential wave IV bottom, comes in at SOX 411, which is also a Fibonacci projection of multiple degrees for this wave IV correction. The most important observation of the action from the January wave III high is that it is overlapping and clearly not (at least not yet) impulsive. That, combined with the parallel trendlines and the momentum confirmation of the wave III high argue strongly in favor of a new annual high for the SOX if the 410-415 area holds prices. We would also note that the wave III high contained a Demark "13" trend exhaustion indicator. A subsequent push higher in the SOX that produced a weekly "9" Demark indicator would be a perfect 9-13-9 indicator as well. Again, 410-415 needs to hold and then move the SOX impulsively up to achieve these technical setups for an ideal 5th wave top.

A close-up of the weekly chart shows the important weekly Demark indicators that registered at the 2002 lows and the 2004 highs. As stated above, a weekly "9" that corresponds to a 5th wave high that registers a momentum divergence on this weekly chart would be an ideal top scenario. Of note in this chart are a number of important Fibonacci relationships as well. The wave III impulse up in this chart is equal to 1.63 (very close to a 1.618, or phi, relationship) the wave I impulse in point terms (wave III =302 pts and wave I = 185 pts). This phi relationship between waves I and III is common in large degree impulse waves, adding further to the technical evidence that the move off the 2002 lows is a larger degree impulse move (5 waves) that has yet to see a wave IV low. As well, if the current 4th wave correction finds a bottom at the 410 area, that would be an exact 50% correction of the wave III move up, which is a common "support" point in 4th wave corrections. These phi relationships, along with the trendline and momentum indicators, all suggest that a low in the 410-415 area could be followed by a large move up to new annual highs in an ending 5th wave in the 620-640 area.

The daily chart shows the parallel channel trendlines more clearly, with a potential 4th wave low touching the lower trendline sometime the last week of July or the first week of August in the 410-415 area. Daily momentum, on a move to 410-415, is unlikely to confirm the new low, adding evidence to the idea that this move lower from the January highs is corrective and will find an important bottom from which to rally strongly.

A daily chart with Demark indicators shows no important trend exhaustion indicators at the wave III high, an unusual condition if this January top was a critical trend reversal point (in other words, if the alternate count that has the January highs as wave X were operative, we would expect to see a daily Demark signal somewhere near the January highs. There are none, which is highly unusual). The correction from the January highs however, does show a Demark "13" trend exhaustion signal at the wave W low and the wave X high but no trend reversal signal anytime hence. I expect the wave IV low to register one or more important Demark trend exhaustion signals near its projection support level of 410-415. Fibonacci relationships in this chart to note: wave W will equal wave Y, a common relationship among double zig-zags, at SOX 411.25. Furthermore, this daily chart shows the overlap within the price action off the January highs. If the January highs were truly a large degree top, more impulsive action would have been expected by this stage of the decline.

The daily chart shows the expected pattern that should play out if the double zig zag is in effect, with the minor b wave of the second zig zag (wave Y) potentially playing out as a triangle formation. The key to this interpretation is that the triangle pattern typically precedes the final move of the pattern of one larger degree. This means that a triangle pattern from the May lows implies that the entire move off the January highs will soon come to an end with one more impulsive move down toward lower Fibonacci projections in the 410-415 area. However, even if the triangle formation from the May lows is not playing out and instead a simple zig-zag upward bounce is taking shape toward 490-495, the move off the May low remains overlapped, suggesting another move down is the most likely probability. Either way, the conclusions I am coming to for the next several weeks are this: that a wave IV low should soon be registered in the 410-415 area that could result in a substantial move upward. Fibonacci relationships to note in this chart: within wave Y (from the April highs), the about-to-unfold final wave c will equal 0.618 of wave a at SOX 412.70. Interestingly, wave Y above would equal 1.618 * the number of days that wave W took to complete at precisely July 28th, an interesting Fibonacci time relationship within the move off the January peak.

The hourly chart shows the potentially developing triangle in greater detail. The most important observation about this chart is how overlapped the price action is on both the upside and downside. If the May low was an important pivot low of a lasting bottom, the price action to the upside would be expected to be much more impulsive by now. That it is not, coupled with the overlap since May and the "3" wave moves in both directions, makes a triangle pattern possible. Again, if prices move above 491, the triangle pattern will be invalid and we can then expect the SOX to move to near 495 before moving lower toward 410-415. The D wave lower and E wave bounce from there is expected to play out over the next week or two before the triangle pattern ends with an impulsive move lower to the multitude of Fibonacci support we have identified in the 410-415 area. The D wave should start in the next several sessions and carry prices lower (in overlapping fashion) to the 455/460 area where a bounce should be expected that takes the SOX higher toward 475/480 in a final wave e of this triangle off the May lows. Once the e wave is complete, a final impulsive wave down is expected that could take prices into the 410-415 area for a final wave IV bottom perhaps in late July or early August.

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