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Advanced Technical Analysis - BKX



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.

We are updating our September 9th note on the BKX in which we stated that the corrective bounce from the May lows was ">95% complete". In fact, as subsequent price action has indicated, the corrective wave 2/B peak in the BKX was registered on September 7th at 100.18. From that peak, the BKX has generated a near textbook 3 wave decline that is currently in a wave 4 bounce that "should" end soon (today or tomorrow) and then head to slight new lows beneath 96.44 in a 5th wave off the peaks at 100.18 on 9/7/04.

Once those "5" waves down are complete in the next week or so, we will then be on the lookout for a longer (3-5 sessions) and larger (150-300 bps) bounce to take prices back to important Fibonacci resistance in the 97-99 area where we fully expect the BKX could fail and start the next larger and more impulsive move down toward our minimum Fibonacci target at 88 and more likely target at 80 over the next 2-3 months (Again-this is NOT advice--we are simply assimilating technical guides). We would note for Fibonacci enthusiasts out there that the bounce from the May 10th lows traced out a near perfect ABC zigzag pattern with nice Fibonacci price and time relationships.

Specifically, the A wave (5/10 lows to 6/7 peaks) and the C wave (the 8/6 lows to the 9/7 peaks) were a combined 60 calendar days (28 and 32 respectively) while the B wave (the 6/7 peak to the 8/6 lows) was exactly 60 calendar days as well. The A wave traveled increased 7.75 BKX points and the C wave 7.32 BKX points, near equality (a common Fibonacci relationship in ABC zigzag patterns). In addition, the entire ABC upward zigzag retrace almost an exact 78.6% of the impulse sequence down from the March peaks to the May lows.

In the very short term, our tools suggest that the current rally off of Tuesday's lows could end soon and then decline anew to somewhere in the 95-96 area before finding a 5th wave (off the 9/7 peaks) low. Once that "5" wave move down from the 9/7 peak can be identified, the confidence in the larger bearish analysis (toward 88 minimum and 80 more likely) increases even more. However, once that new low in the 95-96 area is seen, the potential for more meaningful bounce (5 days +/-) could develop that takes the BKX back up to the 97-99 area before starting an even more impulsively bearish wave down.

As a result of this expected action, we will be patient and wait for a clean 5 wave down to 95-96 and a subsequent 3 wave rally back to 97-99 before confidently analyzing the beginning of the bearish trend. As we stated in our 9/9 note: "An ETF that is highly correlated to this index is the Financial Select Sector SPDR (XLF). The BKX index and the XLF have a +99.4% correlation over the last 2 years (n=520 so clearly statistically significant)."

No positions in stocks mentioned.

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