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Complexity Analysis



Editor's Note: The following is a brief summary of the analysis 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.

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.

We spent last week's vacation mulling over some long term charts and complexity models for various indices here in the US and abroad. What did we conclude? There are two basic scenarios that are most probable: (1) prices will turn down imminently (today or in the next few weeks) into a secular bear trend or (2) will chop around without making substantial gains into the end of Q4:05 or beginning of Q1:06 before the secular bear market (re)starts.

Our job is to trade as if any peak could be THE peak; using tight stops will allow us to make some money on the short side until the secular bear trend emerges in full. Similarly in the short term, two scenarios present themselves, with definite parameters: Either (1) the price action succumbs to a serious and sustained decline from around the current prices levels and falls below 1210 SPX and towards much lower numbers into late October or, indeed (2) the SPX 1255-1260 area will be seen into the end of September before we are presented with another chance at selling the market short aggressively.

The best index to watch for which of the two scenarios above playing out is the Russell 2000: with a clearly impulsive move up from August 30th, only two potentials exist for that index: either (1) a decline of 150-250 bps over the next several sessions to support at 656-665 and then a large bounce to slight new annual peaks, or (2) a rapid and impulsive slice through those supports for a meaningful decline into late October. Our probabilities suggest the bearish resolution is a 60/40 probability over the bullish one to new peaks.

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No positions in stocks mentioned.

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