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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 providing a technical analysis of the BKX today for a couple reasons: (1) the BKX is a close cousin to the XBD (Broker/Dealer) index and the two are exhibiting the same bearish pattern, and (2) the larger bearish educational analysis we are formulating on the SPX and INDU fits nicely into the independently bearish technical conclusions we are coming to with the BKX.

Specifically, the BKX, from the March 5th 2004 all-time peak, has traced out a 5 wave (impulsive) decline to the lows in May; in so doing, the index has strongly suggested that the major trend has turned from bullish to bearish. From this we can conclude that: (1) we could expect another impulsive move lower from current prices that travels at least the same distance (about 12%) and/or (2) that this index will follow the larger bearish pattern we have analyzed in the SPX and INDU that suggests for the bear market from 2000 to resume. In this latter, more bearish interpretation, the analysis would suggest for the BKX, in the next several years, to possibly decline at least beneath 60 if not into the 40-50 area in time.

For now we will keep our analysis to a shorter time horizon and focus on the next 10-15% which we strongly believe will be down. The bounce from the May lows has taken the form of an ABC, corrective looking zigzag into an area of very important Fibonacci resistances. Specifically, the C wave (from 8/6 low to present) would be equal to the A wave (from 5/10 low to 6/7 peak) at precisely 100.85. Zigzag patterns often sport a Fibonacci relationship among the A and C waves: in this case, they would be precisely equal at 100.85. As well, from the 8/6 lows, a very clear "5" minor degree waves up can be seen in what should be a complete or nearly complete C wave of the larger ABC zigzag corrective bounce. Add to those Fibonacci relationships the fact that the 78.6% resistance area of the entire impulsive move down from March to May is at 100.64, and one can see why the current price peak, or one slightly above it, could well mark a very important bear market bounce peak for the BKX. Interestingly as well, in the next 1-3 sessions, a daily Demark trend exhaustion signal could register while hourly Demark indicators have already registered at the peak in Tuesday's session. As for the more classic technical indicators we use to supplement our Elliott wave and Demark indicators, daily momentum (MACD lines and histogram) has already turned down and just as importantly, the peak on Tuesday was registered with a very clear and substantial hourly momentum divergence.

All of these provide ample evidence, when combined with the wave pattern down from the March peaks to the May lows, that a substantial trend change occurred in the BKX at the March peak and that the last 4 months have been tracing out a corrective, counter-trend bounce to important Fibonacci resistance. The analysis for this index then is this: a possible downturn (and especially any new peaks) unless levels cross upward through 102.50 for a move at least below 89 if not something far more bearish.

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). As a result of this tight positive correlation, any moves that the BKX makes could be very much reflected in the XLF tracking stock, despite the fact that the constituents and weightings of the companies represented by the two instruments are different (not advice).

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No positions in stocks mentioned.

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