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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.


Friday's note suggested that there were two acceptable ways to interpret the three sessions of net sideways movement last week: (1) as an internal wave 2 correction that will fall almost immediately (today or Monday) and not put in a new peak or (2) as part of the terminal pattern of the corrective bounce off the 8/13 lows with targets at slightly higher Fibonacci resistances before the larger bearish trend could reassert itself." Friday saw the levels we mentioned for the NDX (1403) elected while the SPX and INDU levels (1032 and 10450) were not yet elected.

The action however, given the new peaks put in by the SPX and NDX, obviously suggests this bounce is carrying farther and for longer than we originally had anticipated early last week. Regular readers may recall that, back at the end of July, we were looking for a corrective bounce that would take the markets back to the equivalent of the SPX's then Fibonacci resistance in the 1112-1124 region. Prices collapsed well before ever getting to those levels however. Now the situation seems to be the exact opposite: we were expecting a more shallow bounce and we have gotten a larger bounce that has lasted longer than the indicators would have suggested.

There are two important observations with regard to this parallel: (1) our original late July resistance targets were SPX 1117-1120, INDU 10250-300, and NDX 1435-1445. These targets are not that far from the existing Fibonacci resistances that we have been citing these past few sessions. (2) The nature and form of the bounce from the 8/13 lows still remains corrective looking. This means that the most likely interpretation is that the entire move off the 8/13 lows is still a mean-reverting bounce that probability suggests should fail to new annual lows sooner rather than later. The very short term technicals remain somewhat unclear: hourly momentum remains diverged (though less so than last Thursday), ticks have been diverging since 8/31, breadth peaked and has been diverging since 9/7, but hourly Demark trend exhaustion indicators have restarted a new sell countdown and have not yet completed. The Elliott wave pattern is open to a number of different and acceptable interpretations but the bulk of them remain bearish given the overlap in prices from each important trough (especially in the NDX).

Despite the persistence of the bounce and the relatively less attractive short term technicals, the possibility for a downtrend for the SPX and INDU remains in place. The next layer of Fibonacci resistance for the SPX is 1128-1132 and for the INDU 10390-10412. For the NDX we will remain patient as the short term pattern there remains less clear. A "5" wave move down that takes out 1370 would be a good first sign of a bearish trend change in the NDX.

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