Advanced Technical Analysis - SOX update
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.
Today I am updating the technical note I published on 7/1 that discussed reasons why the SOX could decline to 410-415 toward late July or early August. As of yesterday's low at 417, the SOX has come very near to my 410-415 target range and has done so much sooner than I originally envisioned. The question is this: does this decline give me more or less confidence that the 410-415 area will hold and produce a sizable bounce or does the last 15 days' action suggest that the 410 area will fail?
First, there is no change whatsoever to my weekly and daily technical indictors' conclusions: that the move down from the high in January "counts" best as corrective and therefore suggests that the entire move down from January is a 4th wave correction that could find a bottom at 410-415 and potentially rally hard to new annual highs. The real question then is to determine what the technical indicators of the last 2 weeks have produced: do they reinforce the "bounce from 410" conclusion or do they suggest that 410 will be taken out and 340-360 be the next stop? The short answer is this: the weight of the technical evidence, including the recent 2 weeks worth of action, still suggests that the highest probability call is for the SOX to find an important bottom at the 410-415 area and bounce. As of right now, I believe the bounce could be substantial to new annual highs, but a close eye should be kept on the levels to guard against the more bearish alternative. When I get closer to a bottoming call (again I said late July, early August for a potential turn date), I will have both a more granular read on a precise bottom area as well as a good place to set reassessment levels in case this bounce call is wrong.
The interpretation of the move off the highs on May 28th is open to a few good possibilities. The most important conclusion from all the interpretations of the move lower from May however is that, so far, the decline still looks like it is part of corrective pattern (that is, against the dominant up trend). If the more bearish interpretation is operative, prices need to continue to break down very hard here and not generate bottoming indicators on the daily and hourly charts. A clean break of 410 would cause me to abandon the bullish call for a major bounce. At this stage, if the 410-415 area is indeed going to hold, I'll want to see the rapidity of the decline slow measurably, some hourly Demark trend exhaustion indicators start to develop, for hourly momentum to diverge on any new price lows, and for potential wave overlaps (wave 1/wave 4) and/or 3- wave ending patterns to trace out. Many, if not all, of those bottoming indicators are expected to register if the 410-415 area truly is a critical pivot point for this index. So far we do not yet have those (and of course we are not yet in the 410-415 area). Once we have those technical indicators of a bottom present, and prices are in the 410-415 area, we'll start to look for a potential bottom and the start of a potentially major trend change up. For now then, the immediate trend remains down until more bottoming indicators line up in the 410-415 area.
The parallel trendlines in the weekly chart (from Jan. '99 to present) 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 in favor of a new annual high for the SOX if the 410-415 area holds prices. I 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.
The close-up of the weekly chart (from Jan. '02 to present) 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 the 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 is potentially nearing 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. Only if the 410-415 area fails to hold prices would the bearish interpretation become the most probable.
The daily chart (from Nov. '03 to present) 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, I 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. As of 7/14, a TD Combo "12" has registered: one more new low would register a "13" trend exhaustion signal on the daily chart, which could portend an important turning point is near. Fibonacci relationships in the chart to note: wave W will equal wave Y, a common relationship among double zig-zags, at SOX 411.25. Furthermore, the 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 (6+ months from the top) of the decline.
The daily chart (from Dec. '03 to present) shows one of the interpretations of the May peak to present, with an ending diagonal pattern playing out from the May peak, the wave (iii) of which is nearly complete. In this interpretation, a wave iv bounce could take the next week or so, then be followed by one more swing low in the 410-415 area. That would be an ideal uptrend setup as it would create "better" Demark exhaustion points as well as lead to nice overlap in the final impulse wave down from the May peak. There are any number of ways that the pattern can play out however, so I'll simply have to be attentive to the classic bottoming signals around the 410-415 area that I highlighted above in our text in the introduction. 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 (from May 28, '04 to present) shows three possible bullish counts, all of which are possible. As I have stated, only a move below 410 would cause me to become bearish again for a move to 340-360. Otherwise, potentially one of these three interpretations may play out as prices approach the 410-415 area. The target "time" for the low as I have stated is late July or early August. Two of the interpretations would fit that target bottoming date nicely. Only the white interpretation calls for a bottom very shortly and a decisive bounce thereafter. I'll simply have to keep a tight eye (short time frames) to determine which is operative. For now, a downtrend is still seen until we hit the 410-415 area. At that point, I would await the bottoming indicators I am looking for before considering a large uptrend.
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