Market Turning Points
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analysis: Cycles - Breadth - P&F and Fibonacci price projections
"By the Law of Periodical Repetition, everything which has happened once must happen again, and again, and again -- and not capriciously, but at regular periods, and each thing in its own period, not another's, and each obeying its own law... The same Nature which delights in periodical repetition in the sky is the Nature which orders the affairs of the earth. Let us not underrate the value of that hint." ~ Mark Twain
Current Position of the Market
SPX: Very Long-term trend - The very-long-term cycles are down and, if they make their lows when expected, there will be another steep and prolonged decline (which appears to have already started) into 2014.
SPX: Intermediate trend - A very strong uptrend typical of bear market rallies has begun. However, the existing pattern suggests that a correction is due.
Analysis of the short-term trend is done on a daily basis with the help of hourly charts. It is an important adjunct to the analysis of daily and weekly charts which discusses the course of longer market trends.
We've got ourselves a rocket-propelled uptrend! In nine daily trading sessions, the SPX has tacked on 149 points, or almost a 14% gain. You'd think that we had started a new bull market but, considering the major cycle lows that lie ahead, that's highly unlikely, and we are probably only experiencing a very strong rally in a bear market. As anyone who has followed the stock market for a while knows, bear market rallies are supposed to be fast and furious by nature, and this one is taking place in an extremely volatile period, so perhaps we should not be so surprised at its velocity.
In spite of this, we can still make sense of where we are and what is likely to come next. The structure appears to consist of five waves from the 1075 low, with the index now completing its fifth wave. If this is correct, the entire move would be wave A of the upward correction, and we should be on the verge of starting wave B.
The Point & Figure charts seems to support this analysis. The base pattern -- including a small extension -- gave us a projection to 1171. This is where the rally paused after completing wave 1. Wave 2 formed a re-accumulation pattern which provided a count to 1221, with a possible extension to 1230-1233. Wave 3 stopped at 1220, giving way to a wave 4 correction. When that pattern was completed, we had another projection to 1223 with a possible extension to 1230-1233 (which matched the count across wave 2). Incidentally, there is also a potential base extension count to 1224 which is well defined and which could turn out to be important.
On Friday, the index closed on its high of the day at 1224, intimating that it may not be quite ready to pull back before attempting to meet a final target of 1230-1233. This could happen on Monday morning, and if it does, we should be ready for the beginning of the most serious retracement since the beginning of the move. If the market decides not to go beyond 1224, it will not invalidate the structure or the projection. However, if we go substantially beyond 1233, some adjustment to the analysis will have to be made.
Besides completing the structure and reaching the target, there are several other coincident technical aspects that argue for an important pause in the rally at this time.
- On its way down to 1075, the index made an extended consolidation of several weeks. The top of that consolidation was 1230.71, and any rally to that level should expect to meet with at least temporary resistance, especially since it corresponds with a short-term high in November 2010 and also matches the P&F projection!
- The move from the low of 1075 to 1231 represents a retracement of slightly over 50% of the entire decline from 1370.
- The 200-EDMA of the SPX is currently at 1234. After a move of that extent, it is not likely that the index can shoot through its 200-EDMA without some consolidation.
- As you can imagine, the daily indicators are severely overbought with the MSO at 100%, and the A/D oscillator is in an area from which it normally retraces.
- All the hourly indicators are showing negative divergence.
- The 17-week cycle is expected to make its low next week. The effect of this cycle on the stock market is not consistent, varying from a small ripple to a sizeable move. In this case, if the SPX does top on Monday, it could bring about a significant initial correction.
- Finally, on Friday, my leading indicator started to show some negative divergence to the SPX on an hourly basis. That is only the second time that it has happened from the beginning of the rally. The first was during the wave 2 consolidation.
Taken all together, these are good reasons to expect a pause in the rally.
Let's look at charts!
We'll start with the Daily Chart of the SPX.
The index is trading in an intermediate down-channel and, since making its low at 1075, has been in a sharp counter-trend rally which is close to challenging the top trend line of that channel. It is not expected to move out of it at this time but, after a correction, will probably go though and at the same time surpass its 200-EMA.
At its current level, the index faces some serious resistance from previous tops and from the 200-EDMA, while the indicators are very overbought. Because there were only minor consolidations along the way, the MSO does not show any negative divergence, but the A/D oscillator is beginning to.
In order to give a sell signal, the indicators will have to turn down, drop below their former small consolidation low, and the black line will have to cross below the pink one.
The Hourly Chart provides us with a clarity for the short-term moves that is not achievable on the daily chart. Here, the 5 waves from the low are very distinct. Whether the 5th wave is complete at 1224, or if we go to 1231-33 first is moot. There are indications that this move is coming to an end.
The resistance levels are marked in dashed red lines. A pattern of deceleration is very obvious, especially in the MACD which is now sporting some negative divergence along with the other indicators. Because of the deceleration process, the up-channels had to be adjusted. When the price breaks out of the second channel, it will also turn down all the indicators, and this will signal the start of the B wave correction. How far down will it go? With the top presumably almost in place, we can make some projection estimates with the P&F chart. An absolute minimum retracement would be to 1190 (the low of wave 4) which could easily be achieved by the time the 17-wk cycle makes its low. If the 1190 level is broken, the entire correction could potentially end between 1155 and 1160 which would also be a 50% retracement of the rally.
The bottoming of the 17-wk cycle is now our first concern. Ideally, it is due next week, on 10/20, but it is unlikely to mark the low of the correction. Perhaps the 13-wk cycle, whose low is due in the first week of November will be better suited, time-wise. Again, don't get stuck on these dates. They are only loose guidelines. There are better ways to predict the low of the B wave.
This is an updated chart of the NYSE Summation Index (courtesy of StockCharts.com). The index has finally established an uptrend after overcoming its 50-DMA that will most likely continue until the market has completed its bear market correction.
The VIX has finally broken below 30 -- which was an important support level corresponding to the 1130 level in the SPX. That does not mean that the SPX will break above its resistance level right away, but it's probably an indication that it will, eventually.
Right now, the VIX is approaching a support level, and if it should break below, it will have the support of its bottom channel line and its 200-DMA. That should certainly provide some temporary support corresponding with the expected retracement in the SPX.
It may be time to have another good look at gold. It is highly probable that the sharp drop that GLD suffered recently was a wave 3 of the beginning of a corrective move. Should that be the case, the lethargic rally that the index is presently undergoing is most likely wave 4 and, if the SPX is about to make a temporary high - which would probably coincide with a low in the dollar - GLD should be ready for wave 5 of its initial corrective wave.
If GLD were to start its decline now, the P&F pattern that has been formed already has a confirming count down to 143.
There is plenty of technical evidence that the SPX rally from 1075 was in the form of an impulse wave which is now coming to an end (or has already come to an end). If this is the case, this should be considered the half-way point of a corrective pattern (wave A), to be followed by a correction (wave B), and finalized by another impulse wave higher (wave C) to complete a zig-zag formation, after which the bear market decline would be free to resume with renewed vigor.
The next few days should confirm the validity of this analysis.
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