This column correctly identified that a low would be in place by last Tuesday. I was watching the character of the bounce to determine what would come next. In Tuesday night's update, I hypothesized conservative; we should look for a bounce up to the 38% retracement level of the drop. By Thursday, the only major index that hit 38% was the S&P 500. By Friday, the Dow was there as well. However, the candles are not supporting even the notion of a decent bounce at this point. The S&P 500 opening tick on Friday was 1403.49 and the close was 1402.85. This is called a Nison doji. As Steve Nison states in his advanced materials, we need not nit pick to get exact matching price precision in our dojis. Since he is the guy who imported this fine technology from the Japanese, their take is we should look at the character of the bar and anything within a buck will do. The Dow did not come as close to a doji but did leave upper and lower tails, which already implies confusion on the part of buyers. Tech did its usual thing on a 'news event' Friday. The futures spiked right up in the first hour and faded the rest of the day.
At this point, we have the S&P 500 acting as the market leader to the upside and this is not a recipe for the start of a fresh rally leg. Let us go back to beginning of January. Throughout the holiday season, we saw the NDX/NASDAQ sputter and I stated at the time that no rally would take place until we had a day where the NDX was leading to the upside. As you know, we spiked down hard on January 3 but from that point, the NDX did lead us higher. Now my sentiment is the same. Unless and until the NDX/NASDAQ decides to wake up our chances of retesting the recent highs remains small. Could the landscape change? You bet it can and it could change on a dime! However, that is a lower probability right now.
Therefore, here is where we are entering the week. The NASDAQ E-mini leads the market for better or worse. Last Monday it started a technical leg up. The range off the bottom (1708.50-1742.25) was 33.75. The retest of the low on Tuesday was 1711.25. A 1.618 extension of that first little burst equals 54.60 points. Add that to the secondary low and we get 1765.85. Friday's high was 1767.50. We were very close to a perfect 1.618 extension off the bottom. We have all seen massive rallies in all degrees of trend. In this case, we just observed a textbook Fibonacci extension that could not even get to the intermediate level 38% retracement of the larger trend going the other way. Anyway you spin it, the internal calculations suggest the patient is not well.
But we have to look at this situation in the context of the larger degree cycles. Monday through Wednesday, we finally arrive at the 160-62 day trading window off the major pivot July 18 low. In terms of calendar days, Monday closes the 233-236 day window off the same pivot.
On a technical basis, we had a small degree ABC up which completed on Friday. It is very possible that is all there is to this bounce. It can still elect to turn into a larger ABC. The cycles allow for more downside activity here. However, we could also have the larger C wave to upper retracement levels directly in front of us. Nobody really knows what will happen. In terms of the cycles, the markets can elect the 160-62 day window to either trace out a high or a low. If it is a low, the most brutal part of the sell-off is directly in front of us. On the other hand, we could also have the most euphoric part of this bounce in front of us as well.
I know this outlook provides no comfort to any of you, it certainly provides no comfort to me. The truth of the matter is the largest part of moves usually happen close to important time windows. Except for late Friday, we were bouncing into this window. Here is the best way to look at the situation. We know we have had a technical 1.618 A, or first wave, that traced out over last week. We do not yet know if this is the place for a resumption of the downtrend but we do know in the very least started a B or second wave on Friday. This means that we are in a position of retesting the low.
When we retest the low, one of three things can happen.
We get a retracement of the bounce that stops going down at one of the common retracement levels.
We retest the exact low and get a double bottom.
Support fails.
If we get either of the first two situations, it will set up a C wave to upper resistance. Looking at the action this way we scale down the possibilities and increase our chances of correctly anticipating what comes next. Some market conditions are clearer than others. Heading into Friday I was thinking we would have a high in the new week but this one can now elect to go either way. I am not confident about that anymore but I do feel confident about a retest of the low.
Jeff Greenblatt
Questions or feedback, e-mail fibonacciman@aol.com
