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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.

Monday's and Tuesday's action has done relatively little to clarify the ongoing analysis we have had looking for a peak in all three indices to manifest in a decided move below the August lows. What is clear however is that the market has struggled to advance. To wit: breadth and ticks remain diverged (though less "clearly" so than last week) but volatility (though only SPX volatility) has confirmed yesterday's new peak.

Given how we have catalogued the presence of various divergences over the last two weeks, you can see why we do not rely on these divergences in any primary way: the Elliott wave count and the Demark trend exhaustion indicators remain the basis of the technical analysis we use. And on those two scores, we remain far closer to a significant peak than to a significant bottom. Indeed, since we first started highlighting in early September the presence of divergences with a potentially completed Elliott wave count and hourly Demark indicators, the SPX has spent almost the entire time between 1115 and 1130: a 135 basis point range in the last 12 trading days (the NDX has been in a 190 bps range since the 10th and the INDU a 170 bps range since the 3rd).

What this means, prima facie, is that the market has struggled to maintain the trend (up) from the August 13th lows. And in the face of several divergences and Demark trend exhaustion indicators on an hourly basis, the risk/reward of a long position has been high and a short position low.

That the market has not yet succumbed to the expected intermediate term bearish trend established from the Q1:04 peaks suggests one of two possibilities: (1) our larger interpretation of the renewal of the 2000-2002 bear market from the Q1:04 peaks is wrong (and thus we could see new annual highs over the next few months) or (2) the current bounce peak is so "important" (i.e. such a large degree top) that it is forming a rounding top that has taken much of the first few weeks of the month to manifest. We have made clear that we believe option #2 is the right interpretation. Even if we are wrong in this assessment, the presence of hourly divergences, trend exhaustion indicators, and a daily MACD that has "rolled over" suggests a week or two of consolidation/downward correction to "balance" the move off the 8/13 lows.

Thus, even in the most bullish scenario, being long here is highly risky, in our opinion (not advice). Unfortunately being short hasn't paid handsome dividends either. Then again, traders haven't missed much upside either in the markets, so the opportunity cost is low for even a flat position. At this stage, the INDU parameters remain valid and we'll maintain them. The SPX and NDX, as per Monday's note: "we think it's prudent to await a failure in both the SPX and NDX below the important Fibonacci supports that we have identified before analyzing the beginning of a downtrend. Specifically, a break below SPX 1120 and NDX 1410 would add considerable evidence to the idea that an important peak has formed." We would look for the possible bearish trend on any move below those SPX and NDX levels.

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