Advanced Technical Analysis
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.
I have been trying to be patient in waiting for a relief bounce in the last several sessions; given the volatility this week, that has been the right strategy. The move off the June highs in all three markets has become very cloudy in the last two sessions thanks to violent and volatile moves up and down that do not "fit" well technically speaking into the very short term indicators we have been looking for. Recall that I have been looking for a completed 5 wave move off the highs of June with the requisite bottoming divergences (momentum, Demark indicators, sentiment, etc.) to signal a significant bounce to higher Fibonacci resistance.
For the SPX and INDU that 5 down looks like it completed on Monday's session. But the 1 ½ session bounce into Tuesday's close would be highly unorthodox if that entire thing was the bounce I was anticipating: it barely made it back to previous resistance, it was confirmed by momentum, and worse, it "should" have lasted at least 3 sessions in time. So that is our conundrum at the moment: (1) all the same hourly momentum divergences still exist that I have been talking about for the last 5 sessions (in fact they are even more pronounced) and (2) the short term sentiment picture is showing bearishness equal to previous May and March lows (which even in a larger bearish trend would be worth a pop for a few % and a few days). The wave "count" however, is, thanks to the Tuesday pop and the Wednesday melt, highly confusing. Further, hourly and daily Demark trend exhaustion indicators are not providing any good clues right here either. So we are left with an oversold market in need of a mean-reverting rally (markets never move in one direction by definition) and showing some signs of positive divergences (bottoming indicators) BUT that does not present an Elliott wave interpretation of the near term that allows us to conclude that the move off the June highs is near finished. The only thing I can conclude is that the larger direction is down until proven otherwise.
More importantly to the multi-week/month trend is the fact that the move down from the June highs, in being so impulsive and in moving so closely to the May lows for each of the indices, adds substantial weight to the idea that the larger trend is bearish off the Q1:04 peaks for all three indices. To this end the NASDAQ composite (CCMP) broke through its May lows already. You will recall that I have been presenting two alternate interpretations of the technical action off the January peaks: one bullish that suggested new annual highs were possible, one bearish that suggested that the Q1:04 highs were the end of the bull market run from 10/2002. The last several days of technical deterioration have added materially to the argument that the bearish interpretation is the right one, and that substantial new lows in the markets are likely over the next several quarters if not years. I am working on a technical note that will analyze the longer term trends using my indicators and it will be published shortly so that readers can place the last 6 months of action within the context of the markets over the last decade or so.
I am offering one more interpretation of prices in the analysis today that could suggest the May lows to be taken out BUT still present the possibility for a substantial (i.e. new highs) bounce thereafter. It remains a low confidence interpretation however.
For now then, the short term remains cloudy enough to keep me on the sidelines, with no clear bottom to be identified. The best I can hope for is still an oversold bounce soon to relieve the hourly oversold condition of prices. If so, I'll try to catch that bounce and position for a correction from higher resistance levels. The intermediate term trend however is deteriorating rapidly. This augurs strongly for the bearish interpretation of prices: that the 2003 and 2002 lows will eventually be breached and the secular bear market that started in 2000 may have re-started in 2004. Stay tuned.
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