Market Turning Points

By: Andre Gratian | Sun, Aug 26, 2012
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Precision timing for all time frames through a multi-dimensional approach to technical
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 may have ended in August. We need confirmation.

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.

Daily market analysis of the short term trend is reserved for subscribers. If you would like to sign up for a FREE 4-week trial period of daily comments, please let me know at ajg@cybertrails.com.


Market Overview

My analysis of the SPX had suggested that the intermediate trend which started on June 4th would end sometime in August, if not at 1404, then at 1425. After reaching 1407 on 8/07, the SPX went into a sideways consolidation which lasted several days, and then moved up to 1426 on 8/21. Meeting that second target brought about a 28-point correction -- the largest in three weeks. The DJIA was a little weaker, giving back 300 points before finding its footing - the equivalent of 32 SPX points at today's ratio. QQQ, largely influenced by the sharp rise in Apple, fared the best, only retracing about a point.

Will 1426 remain the high point of the move and initiate a short-term decline which could eventually turn into one of intermediate status? That is a question that will have to wait another week for an answer. The market is waiting to see what transpires at the Jackson Hole symposium which is scheduled for the coming week-end. Bernanke will be speaking on Friday, and ECB president Draghi on Saturday. Either one of these speeches could trigger the next short-term move in the market and determine if 1426 remains the top tick. If traders like what they hear, they could extend the SPX rally to its next potential projection of about 1445. They could also start a decline if they do not get exactly what they had hoped for!

Another trigger of much lesser importance was Friday's jury decision to award Apple $1.05 billion in its patents dispute with Samsung - which will be appealed! Will Apple sell on the news? If so, it could affect QQQ and bring it more in line with the other indices. The health of the SPX will also depend on how the financial sector performs from this point on. Short-term, that sector is relatively stronger than SPX, but intermediate and long-term weaker.

We wait for another week before updating the forecast!


Chart analysis

With the help of (red) trend lines, I have traced out what I believe to be the intermediate channel in which the SPX has been rising since October 2011. It consists of two outside channel lines and an internal line which acts as a median for prices and which has consistently provided resistance for the rally starting at 1267. For the trend to continue upward, prices would have to jump decisively above that median and not fall back. Last week, the index surpassed its early April top by a small margin but could go no further and retraced immediately.

S&P500 Daily Chart
Larger Image

NYSE McLellan Oscilator

The McClellan oscillator which is posted under the Daily SPX Chart (above) shows that some weakness followed the negative divergence displayed earlier, but not enough to give a decisive sell signal. The momentum indicator at the bottom of the chart tells the same story: deceleration, negative divergence, but no sell yet. To give a sell signal, the indicator would have to fall below the dashed line and penetrate the green uptrend line. That would correspond with the index breaking a support level around 1390/95 which you will see better on the hourly chart. Until that happens, we have to consider the possibility that SPX could be consolidating before making a higher high.

On the Hourly Chart, I have chosen to put the spotlight on the wedge formation which makes up the last phase of the rally from 1267. Prices rose to the median of the larger channel and tried to break through, but couldn't and fell back. We know that wedges are patterns which are caused by strong demand at the beginning coming more and more into equilibrium with supply as the sellers begin to match the buyers and finally overwhelm them, causing the lower trend line to be broken and, most likely, starting a decline which often reaches the point from which the pattern started -- in this case, 1329. If the news resulting from this week-end's symposium are disappointing, this is most likely what will happen. But that is only one possible scenario, and it will have to be confirmed by market action, with the SPX closing decisively below the red horizontal line. On the other hand, positive news may send prices higher, at least temporarily.

S&P500 Hourly Chart
Larger Image

We wait for another week!


Cycles

These are some of the important cycles which have topped and could pressure the market in the next few weeks and months: the 4-yr cycle, the 66-wk cycle, and the 29-30-wk cycle whose low is due in mid-October. There is also an 8-9-wk cycle due in early September, plus a minor cycle due next week and one the following week.

The 66-wk cycle could suppress prices until early January, and then generate the final phase of the bull market into early 2013.


Breadth

Let's look at the NYSI (Summation Index, courtesy of StockCharts.com) to see what breadth is doing on an intermediate basis.

The index made an initial peak in mid-July and a second peak last week. The second peak is about at the level of the first one, while SPX exceeded its July peak by almost 50 points. That is not bullish behavior and is most likely an indication that the longer-term cycles mentioned above are beginning to pressure the rally.

In addition, the RSI -- and especially the MACD - were noticeably lower on the second peak. So we have a situation where the NYSI indices showed negative divergence to NYSI, while NYSI was showing significant negative divergence to the SPX. Hmmm! Not bullish at all!

NYSE Summation Index


Sentiment Indicators

The XIV (inverted volatility index)

Below, I show XIV vs. SPX on an hourly basis (charts courtesy of Qcharts). These charts really point out the value of the XIV as a leading indicator, when contrasted with the SPX. On 8/13, it made a new high in advance of the SPX, but on 8/21, it merely made a double-top while SPX made a new high. This was a warning that prices were about to decline, and they did, 300 Dow points worth!

Since Friday, the two indices have gotten back in sync on an hour-by-hour basis. The XIV is much closer to its uptrend line than is the SPX. I don't know if that is an indication that a more significant reversal is coming when XIV breaks its uptrend line ahead of SPX, but it could be.

VIX
Larger Image

XLF (Financial SPDR)

By contrast to the XIV, XLF is not quite as weak as SPX, as can be seen from the fact that it had a slightly stronger move than the latter at the top and has not retraced as much. Perhaps this will sort itself out in the next few sessions. Time segments which lack clarity normally come into focus sooner rather than later, and a little patience is all that is required.

XLF
Larger Image

As with SPX, XLF will give its first sign of weakness when it drops below the red horizontal line.


BONDS

After making an all-time high of 125 in Oct. 2011, TLT had a six-month correction, retracing only about .382 of its previous uptrend. It then went on to make another all-time high of 132 in the later part of July. Since that time, it has undergone another correction, finding support just above an intermediate trend line at a level which corresponds to its 200-DMA. In doing so, it also filled a near-term P&F projection to 121-122.

During SPX's retracement from 1426, TLT rallied .382 of its latest decline and appears to want to extend its base before moving higher. It has corrected to an important support area which may keep it from going lower before it resumes its uptrend to an unfilled projection of 137. Since it tends to run contrary to the SPX, it's near-term action will be dictated (to some extent) by whether or not the equity market has made an intermediate-term top.

TLT
Larger Image

UUP (Dollar ETF) Daily Chart.

Over the past week, UUP extended its decline to a .618 retracement of its rally from early May, and copuld also have met a near-term P&F projection of 22.30. In spite of the correction it remains in the intermediate uptrend which started in August 2011. While it may have found meaningful support, the fact that its indicator made a new low in conjunction with the price suggests that it may have to do some additional consolidation before getting back in an uptrend.

It is also not invulnerable to going lower. It moves in an opposite direction to the euro, and if the latter responds favorably to news from the ECB, we could see UUP challenge its intermediate trend line.

UUP
Larger Image


GLD (ETF for gold)

After a long consolidation above 149, GLD has finally managed to accomplish something positive. It has risen above the 200-DMA which had been an obstacle to further progress for about 10 weeks, and also rose above 159 -- a former short-term peak. That's bullish for the near-term, but the real test will be whether or not the move can be extended and turn into a resumption of the long-term uptrend.

There are some obstacles lying ahead that may prevent this from being a valid break-out. The most obvious one is that the rise of the last few days has brought the index squarely up against its intermediate-term downtrend. That level is also the junction of a parallel to the lower trend line (the top of a rising channel), and the resistance created by the top of the "e" wave of the mid-course triangle consolidation of its decline from 174.

Another obstacle concerns the longer-term trend of the US dollar. It must be acknowledged that there is an inverse relationship between the move of gold and that of the dollar. I have analyzed the dollar above, and concluded that it is still in an intermediate uptrend, but that it could be vulnerable to challenging the lower trend line of that uptrend if the euro has a sudden spike upward as a result of president Draghi's speech on Saturday. Should that be the case, it would benefit gold and GLD would have no problem overcoming the 162 resistance level.

We must now consider the possibility that GLD has made a double-bottom at 149 in early June, and that it has now built what looks like a substantial base. This has created a potential P&F count as high as 190 (emphasis on "potential"). But such a move would pre-suppose a major advance in the euro and a major decline in the dollar - something which does not appear to be in the cards at this time.

GLD does have a standing long-term count to about 200, and perhaps even to 233. The more likely scenario is that the index is currently building a base that will eventually support such a move. Even if there is more upside over the short-term - perhaps to 164-166 -- this is not likely to be the "big move" just yet.


OIL (USO)

USO has reached its P&F projection to 36, as well as the overhead resistance discussed earlier, with negative divergence showing in the indicator. It may have started to back off but has not yet given a sell signal.

Let's give it a little time to decide if it wants to honor my prediction.

Oil ETF
Larger Image


Summary

SPX has already proven the validity of my 1425 target as a potential top for the move which started at 1267. After reaching it, there was an immediate retracement of 28 points.

It remains to be seen if that level will qualify as an intermediate top. If a higher high has not been made by early next week, the odds are that 1426 will not be exceeded.

 


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Andre Gratian

Author: Andre Gratian

Andre Gratian
MarketTurningPoints.com

The above comments about the financial markets are based purely on what I consider to be sound technical analysis principles uncompromised by fundamental considerations. They represent my own opinion and are not meant to be construed as trading or investment advice, but are offered as an analytical point of view which might be of interest to those who follow stock market cycles and technical analysis.

I encourage your questions and comments. Please contact me at: ajg@cybertrails.com.

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