Market Turning Points
PROJECTION ESSENTIALLY REACHED
for all time frames through a multi-dimensional approach
analysis: Cycles - Breadth - P&F and Fibonacci price projections
and occasional Elliott Wave analysis
"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 (after this bull market is over) there will be another steep and prolonged decline into late 2014. It is probable, however, that the steep correction of 2007-2009 will have curtailed the full downward pressure potential of the 120-yr cycle.
SPX: Intermediate trend - SPX is in a limited intermediate uptrend which is estimated to end in the first week of August.
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.
The better than expected jobs report provided what is most likely the final push into the proposed target area. Since, based on cycles, next week is the ideal time frame for a top to occur, SPX could rise to the low 1400s before a reversal takes place but, with both hourly and daily indicators showing weak patterns and negative divergences, the uptrend which started at 1267 appears to be on its last leg.
It is also likely that next week will mark a pause of the uptrend which started 10/04/11. The odds that 1422 was a major top have lessened, and the coming decline should turn out to be an on-going correction of that uptrend, a C wave if you will. If so, a very rough Fib. calculation would put the next low at about 1215, sometime in early October. I should be able to project more accurately the extent of the correction after the top formation is complete.
If that scenario plays out and if we complete this correction in a couple of months, we should then embark on the final phase of the 2009 bull market, with an expectation that it will end in the first quarter of 2013.
A more bearish scenario -- which is the point of view espoused by Bob Prechter's Elliott Wave International - is that the bull market ended in early April when SPX touched 1422, and that we are already in a bear market. That theory has some merit, but it will have to prove itself. For the time being, I favor the wave "C" scenario.
There is also a bullish alternative which is proposed by Tony Caldero, also an Elliott Wave analyst who disagrees with Prechter's interpretation. He thinks that this uptrend will continue to 1499 before having a serious correction.
Let's look at charts!
Below is a chart of the Daily SPX with the McClellan oascillator placed underneath it. I have drawn trend lines which represent the uptrend channel in which the index is trading. Note that the middle parallel is drawn closer to the bottom than to the top of the channel and yet, for the past two months, it has stopped the upside progress and pushed back prices on six different occasions. Edwards & Magee will tell you that this type of pattern is a sign of weakness and that it eventually gets resolved to the downside -- which is what I expect.
I mentioned earlier that there was a P&F count to the low 1400s. It is supported by an inverse H&S base formation with a projection to about 1400. A weak market pattern which has essentially reached its target has few options other than to reverse its trend. In addition, negative divergence is showing in the momentum indicator and even more so in the McClellan oscillator. For the past month, this index has refused to confirm all new highs with the worst divergence taking place on Friday, just as the SPX was making a new high. Granted, under certain circumstances a weak pattern can evolve into a strong one and negative divergences can be erased by a strong move up, which is what Tony expects. The next few days will determine if the index is capable of doing that, or if it starts to decline instead. (The red channel is drawn presumptively to suggest the path that might be followed by the correction, if and when it happens.)
Perhaps we can get additional clues form the Hourly Chart (below)
The surge to a new high represents most of Friday's action with 90% of the price move taking place in the first hour, and the subsequent five and a half moving sideways. While the price made a new high, the indicator did not, resulting in some negative divergence.
Monday will be a very important day which could put the finishing touches on a top formation. On the other hand, a minor cycle due Tuesday could pull prices down first, with the final high taking place later on in the week.
"The next cycle cluster takes place in early August. It is expected to be a market high, but if it turns out to be a low instead, we will probably not be done with the intermediate uptrend." That quote from last week's letter pretty much says it all.
Below is the NYSI (Summation Index, courtesy of StockCharts.com). It has already rolled over, and since the strong breadth figures on Friday did not help the NYMO all that much, neither has it helped the NYSI which continues to decline with an RSI which is still overbought and dropping as well.
This action in the NYSI and its indicators -- while the SPX is making a new high -- has resulted in negative divergence between price and breadth on an intermediate basis, and deserves a cautionary stance on the part of traders and investors.
The SentimenTrader (courtesy of same) has altered its format, but this does not change its signals which are currently slightly bullish, possibly disagreeing with the prognosis of an important top forming. While a top may be forming, it may not be as significant as envisaged and the proposed scenario may have to be somewhat revised!
The current position of SentimenTrader may also shed some light on future market action. The fact that it is currently far from showing excessive optimism indicates that the coming correction will not be a "major" one. Also, if by the end of the correction it has moved to excessive pessimism, it will suggest that another significant bullish move is coming, which would support the theory that the end of the bull market will not come before 2013.
The XIV (inverted volatility index)
Someone had the excellent idea of making a chart of the inverted VIX (XIV) so that when it is compared to the SPX, for example, divergences could more easily be spotted. The behavior of the XIV on an hourly basis can tell us a great deal about the immediate future behavior of the SPX. It is far less consistent on daily charts, but the VIX appears to work well on weekly charts. Let's take a look at the two charts below (courtesy of Qcharts).
The green asterisks represent positive divergence and the red asterisks, negative divergence. When the XIV diverges from the SPX it usually warns of a reversal. As an example, there was some positive divergence on June 25th and this warned of another up move in the SPX. If fact, the divergence remained essentially positive until July 19th when XIV warned that the short-term trend had come to an end. Negative divergence continued until the 27th, then suddenly switched to positive on August 1 and 2. Someone knew that the jobs report was going to be better than expected!
What happens now is unclear. The strong negative divergence of July 27th appeared to indicate that we had come to an end of the rally from 1267. However, the strength returned to the XIV on Friday and, although it is still diverging compared to July 19th, it is much stronger than the July 27 top. This muddies the waters and we'll have to let things settle down for a while until we can regain some perspective. Does the behavior of the XIV added to the position of the SentimenTrader invalidate the signs that point to a potentially important top? Too soon to tell.
XLF (Financial SPDR)
There is no question that XLF gives advance warning at important tops. The red asterisks on the chart show the position of the XLF when SPX made its long-term top, in 2007, and where it was at the two subsequent important intermediate tops. In each case, XLF failed to confirm the new high in the SPX and foretold that a decline was coming.
Because I wanted to incorporate the 2007 top, this weekly chart is not as distinct as it should be, but it will give you the general idea that I wanted to demonstrate. There is no equivocation here: XLF is getting weaker than SPX. Even over the past couple of months, XLF was rising at a slower and slower pace. On Friday, it had a good move matching that of SPX, but that only put it fractionally above its July 3 high, clearly showing divergence in that relative time frame.
Negative divergence which developed in TLT's indicator showed that it was ready to consolidate after making a new high at 132. Although it has broken a short-term trend line, it remains well above its previous short-term consolidation low of cir.125.
TLT is another index which serves as a market indicator, and if it continues to pull back, it could mean that we are not ready to make an important top. Comments by the ECB president and the fact that the jobs report exceeded expectations probably contributed to disrupting TLTs' short-term uptrend. Let's see if it recovers by the end of the week.
The base that TLT formed at 126 gives it a projection to 134-137, so it has some room to move higher before undertaking a serious correction.
UUP (Dollar ETF) Daily Chart
You can see the similarity of the patterns that UUP and TLT have been making over the past three months. Both tend to move against the market, and their current correction is directly related to the action of the stock market. What I have said about TLT, above, applies to UUP as well, so l don't need to repeat it.
GLD (ETF for gold)
While TLT and UUP tend to go in opposite direction to the equity market, gold has generally tended to go with it. Therefore, the fact that GLD has not taken advantage of the SPX uptrend which started at 1267, is either a sign of weakness in GLD, or signs of weakness for both. GLD has been unable to get past its 200-DMA, which is starting to roll over. If the market does start a meaningful correction, GLD could easily break its 149 support and start another down wave.
FXE (Euro Trust ETF)
The Euro Trust ETF (above) is in a well-established, long-term term decline which just recently found support at 120 and is experiencing an interim rally similar to the one in June. It is a probably a long way from reversing its downtrend and may not be finished making new lows. Only if the ECB implements the reforms mentioned by its president will it be able to make a more significant recovery. Otherwise, its action will most likely be confined to building a base for an indefinite period of time.
Relative weakness of other indices:
Relative deterioration continues in small caps vs. large caps (historically bearish). This is additional support for the proposed scenario that an important top may be forming.
Another example of increasing relative weakness is demonstrated by comparing the Dow Transportation to the Dow Jones Industrials. This is not something that would make the Dow theorists bullish.
There are many signs that an intermediate top is forming. Last week's action took the SPX within a short distance of its estimated target, heightening the probability that a reversal is about to take place. There are still a few missing pieces, but they could fall into place by the end of next week.
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