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Complexity Analysis

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Editor's Note: The following analysis was offered this morning via Scott Reamer's technical service. We share this vibe with educational intentions only. For more information regarding Scott's unique approach, please click here.

The bounce from the London bombings event is weakening and continues to setup a potential short-term peak that could decline 2-3% over the next week or so of trading. Short-term divergences of momentum, breadth, ticks, volume, and volatility suggest that a pullback of some degree is expected in the next few sessions.

We suggested last week that the blue chip rally of 3.1% and the Nasdaq rally of 4.3% in a straight line would likely need to consolidate before moving to higher numbers in the SPX 1237-1247 and DOW 10700 +/- areas. Since last Monday's open, the SPX is up 0.3% and suggestive that indeed, the strength of the previous week off the London bombings has reached a potential short term bifurcation point that could well test lower support levels in the 1200-1210 area (DOW 10360-10470) in the next several sessions.

Recall too that our models for the intermediate term are suggesting that the greatest probability for prices is to advance to the 1237-1247 area (DOW 10700 +) in a 3-step fashion: a strong bounce off the London bombings lows, a consolidation (expected imminently) and then one last (even weaker) advance to our upper targets that shows intermediate term divergences in up vs. down volume, momentum, breadth, ticks, and volatility.

We are looking for an important peak to form in stocks as measured by all the indices we follow: the SPX, the DOW, the TRAN, the OEX, RTY, NYA, etc. The NDX complex remains much less clear here on an intermediate (multi-week/month) basis. There are several reasons to be cautious on the NDX: (1) the divergence between the NDX and the Nasdaq Composite, (2) the significant momentum divergence on a daily basis on these new peaks, (3) hourly divergence in ticks, breadth, momentum, and volatility not to mention a meaningful volume divergence of late. All of these things, plus the price action in our models, are suggestive of some sort of short term NDX peak being nearby.

The difficulty for NDX trades on a longer time frame is that our models are decidedly low confidence about potential paths for prices after these short term hourly divergences are resolved. Our analysis suggests weakness in the SPX, DOW for a 2-3% 5+/- session move lower here with a move thru SPX 1240 and DOW 10700 forcing us to the sidelines. The next big peak may occur in a few weeks from slightly higher levels based on our work. Not intended as advice but wanted to keep you up to date on our models.

About Complexity Analysis
Probability- and fractal-based price analysis that attempts to predict potential bifurcation points in price patterns where trends reach points of exhaustion. Underlying the work are a host of traditional, non-traditional, and proprietary technical analysis tools including pattern analysis, DeMark indicators, and momentum measures among others.

No positions in stocks mentioned.

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