Market Turning Points

By: Andre Gratian | Mon, Sep 3, 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

Last week, after reaching the stated projection and building what looked like a distribution pattern, the SPX had an opportunity to start a correction. Instead, Friday's action could be the start of another (final?) up-thrust to a new high -- at least, this is what the advance/decline action suggests.

In order to give a sell signal, the SPX would have to close below 1395. On Thursday, it made a correction low of 1397.01 and had a good bounce. Friday was marked by initial volatility resulting from Bernanke's speech to which the market eventually responded favorably, up 7 points for the day. The index is now well positioned for a break-out to the upside, needing to be up only 5 points on the day to close outside of its corrective downtrend line. Since the low of the correction was made with positive divergence in the A/D indicator, the odds of a near-term break-out are favorable.

There is another event which could trigger an extension of the rally from 1267. On Monday, ECB president Draghi was slated to discuss (behind closed doors) his plan to address the Eurozone problems. Even if the reaction to the leaked portions of his proposal is only mildly positive, it could move the market to re-test the former high of 1426. On the other hand, there is enough accumulation at the 1406 level to send the SPX at least 10 points beyond. More specific projections will be given to subscribers before the market opens on Tuesday, in the Morning Comment.

A more important meeting scheduled for Thursday (when ECB is expected to unveil a bond-buying program) should have a greater influence on the short-term market direction. And then, of course, next Friday will feature the jobs report.


Chart analysis

From this perspective, little has changed since last week. The consolidation which started at 1426 has continued and formed a pattern which could evolve into a rally or a decline by next week for the reasons given above. It would not take much to break below the horizontal red line which identifies the support level. If this were to happen, a short-term downtrend would quickly challenge the main trend line below and, if broken, the 200-DMA. Actually this trend line was drawn as a parallel to the trend line connecting the tops in order to illustrate the channel in which prices are moving. If it were re-drawn to connect the lows, it would intersect with the MA right around 1340 and would undoubtedly provide strong support. Only if that support were broken could we assume that an intermediate correction might have started.


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Considering the other potential scenario which, from a purely technical perspective, has better odds, a rally evolving from this level would most likely find some resistance at the top of the channel which is currently at about 1436 -- a level which is a match for a phase projection established at the 1406 level.

As usual, the McClellan oscillator is posted directly below the SPX daily chart. This week, it has some interesting features which may provide some insight into the near-term direction of the market. First, it appears to be finding support at the bottom of an up-channel. Secondly, the blue arrow indicates where the A/D indicator held at a higher level than its previous low when SPX made a new correction low. This is positive divergence and it normally occurs at the beginning of a positive reversal in trend. Is this predicting a favorable response to president Draghi's proposal?

We'll now analyze the Hourly Chart of the SPX, below which I have posted an hourly look-alike version of the McClellan oscillator (courtesy of Qcharts). This chart brings into more focus the comments made about the daily chart. It shows more clearly the red horizontal support line which must be broken in order for a decline to start, and the A/D oscillator which developed some positive divergence before making a bullish cross and turning positive.

The picture presented by both the daily and hourly charts is essentially neutral, with a slight advantage for the bull case. This suggests that a small preponderance of traders are betting that president Draghi's testimony will produce a positive reaction in stocks.


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Cycles

Last week, I mentioned that important cycles were in the process of topping in this area. These are intermediate and long-term cycles which can take a while before producing negative results in the stock market. Under this cyclic configuration, it is not unusual for stocks to be making a rounding top exhibiting deceleration in the intermediate trend before the start of a decline. While August was the ideal month for a reversal to take place, it may turn out to be September instead.


Breadth

On an intermediate time scale (which is what the Summation Index -- courtesy of StockCharts.com -- portrays), the NYSI's RSI and MACD are both declining after showing negative divergence, but they have not yet turned negative. The NYSI itself has made a double top, but remains above its MAs and its former low.

If the market is to make an attempt at resuming its uptrend, this negative action must be reversed by positive breadth in the next few days.


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Sentiment Indicators

The SentimenTrader (courtesy of same) remains essentially neutral which, considering its excellent track record, could be a warning not to get too bearish at this time. Its reading probably would not stand in the way of a short-term decline, but it is not one which occurs at important tops.

The XIV (inverted volatility index)

Below, I show XIV vs. SPX on an hourly basis (charts courtesy of Qcharts). The last (minor) negative divergence occurred on Wednesday and signaled Thursday's drop. Since then, it has been essentially neutral. We'll have to wait for better signals from this indicator in order to forecast the next reversal.


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XLF (Financial SPDR)

Although XLF is keeping up with SPX on a short-term basis, it is diverging significantly on a long-term and intermediate-term basis. This divergence started over a year ago and has been growing increasingly worse. If the bull market which started in 2009 is to continue, the relative strength of the XLF will have to improve.

The XLX and SPX are pretty much in sync over the short term. The chart patterns are basically the same and the trend lines pretty well match each other.

Like that of the SPX, the XLF indicator is essentially neutral and pretty much reflecting the condition of the price index.


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BONDS

Last week, I mentioned that TLT had found good support just above an intermediate trend line which coincided with its 200-DMA. As of Friday a week ago, it had achieved a .382 retracement of its last decline, but it did not stop there. After a very brief consolidation, it forged ahead and increased its recovery to .618 of the decline -- and it does not look finished! There were five separate gaps created


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on the way down and TLT has now filled three of them. At the rate it is going, I would not be surprised if it retraced all of them and continued on to make a new high. But if SPX rallies, it may consolidate, first.

There is not a clear accumulation pattern at the low which would give us a projection, but I could conjure up something in the vicinity of 130. As mentioned before, there is an unfilled count to 137 which could be attained when the market begins to correct.

There is no sign of divergence on the indicator. Not even a loss of momentum.

UUP (Dollar ETF) Daily Chart.

The dollar made a slightly new low on Friday when the euro gapped to a new high. The euro gave up most of its gain by the end of the day while UUP recovered partly, but did not make it back above its 200-DMA which was breached in the process. Chances are pretty good that it will. It is sitting on good support from a previous congestion level and trading just above its intermediate trend line.

Its indicator, which was not showing any divergence on the last minor low, is now doing so. Of course the fate of UUP will be decided by what happens to the euro next week.


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GLD (ETF for gold)

The chart of GLD is very close to being the reverse of that of UUP. The only difference is that GLD slightly penetrated its intermediate downtrend line while UUP stopped just short of it.

A similarity lies in their indicators which are both showing divergence: positive in UUP and negative in GLD. That could mean that the move is nearly over. In the last newsletter, I had mentioned that GLD had the near-term potential of reaching 164-166. It reached 164 on Friday and could now make it to 166 before correcting.


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OIL (USO)


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USO is finding resistance at the red line which I had previously drawn on that chart. It has also filled its 36 target. Last week, there was a slight penetration of the short-term uptrend line, but it held and closed above it. Unless USO continues to rally strongly from this level, the next time the trend line is challenged, it will probably be broken decisively and mark the beginning of a correction.

Let's give the index a little more time to define its next move.


Summary

There were some hints by the end of the week that SPX would try to move higher. This is most likely due to expectations of a positive response to ECB president Mario Draghi's plan to save the euro, Thursday. I need to wait for the market's reaction to this presentation before making further comments about the current trend.

 


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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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