Market Turning Points

By: Andre Gratian | Sun, Sep 9, 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.

As the above comment from last week's newsletter stated, the technical position of the market suggested that the two-week consolidation had come to an end and that another bullish leg of the intermediate trend which started at 1267 on June 4 was about to start. The trigger for that move was the plan submitted by ECB president Mario Draghi to support the euro. The markets responded favorably and the SPX had a 28-point move on the day of the announcement. The next day (Friday) the index tacked on another 5 points in spite of a less than stellar jobs report.

This follow-through by the SPX was not shared by the QQQ, and only reluctantly by the DJIA. Furthermore, the Dow was the only index that was not able to overcome its 8/20 peak, which makes it the weakest of the three indices mentioned. This probably means that we are very close to the first correction of the new uptrend. SPX has a phase projection to about 1440, two points higher than where it closed on Friday. The QQQ and DJIA got to their near-term target first.

There is an important index to which I have not paid enough attention lately. It's the SentimentTrader, and Inormally include it in my newsletter on a regular basis. I have not shown it lately, because it was giving a neutral reading. That should have told me that the market was not ready for a major correction at this time in spite of the cycles which are topping in this time frame. One of the most important is the 66-wk cycle (there are others) which is due to make its low in early January, and whose half-phase -- in conjunction with the 2-yr cycle -- created the June low.

The recent consolidation tells us that these cycles are beginning to have an effect on the market, but it was not enough to offset the important news announcement by the ECB. Now, it's a question of how long the news rally will last. The cycles have not gone away and their downward pressure on the market should soon, again, become apparent. This is why it is important to gauge the effect of the coming correction. We should also keep in mind that 1440 is only a phase count. A better target (which is also a phase count) for this move might be 1446-1449.

If I were to take into consideration the count generated by the entire consolidation, it would give me a projection to 1486, and perhaps even 1495. If the SPX fails to start a meaningful correction from 1446-1449, we will be forced to take these higher projections seriously.


Chart analysis

We'll start by looking at a Weekly Chart of the SPX which goes back to the beginning of the bull market on March 2009. It's fairly obvious that, with the index making a new high last week, the bull market is alive and well. It's also obvious that the intermediate trend from October of last year is also in good shape, although we should acknowledge that some deceleration is taking place in both the long-term and the intermediate trend. Since October, prices have only been able to get slightly past the middle channel line, and one can say the same thing for the intermediate trend. This deceleration process is better seen in the MACD where it has created negative divergence.

SPX Weekly Chart
Larger Image

We also notice that two weeks ago, the last top reached the intersection of the two middle channel lines and was pushed back. Last week, SPX met with the same combined resistance and this curbed its initial exuberance. Since prices have reached a P&F phase count in that area, it looks like a good place from which to start a correction.

Before moving on to the daily chart, let's discuss the trend lines which define both intermediate and long-term trends. In order for the index to put an end to its intermediate trend, it would have to close under 1385 on a weekly basis. Since that would also put it below the 1395 support level to which we have previously referred, such a close would decisively end the intermediate uptrend and most likely start an intermediate downtrend -- perhaps into early January.

For the long-term trend line to be broken, prices would have to drop to about 1225, and that might not even be decisive because, for a sure thing, a close below the October 2011 low of 1060 would be needed. The trend lines are moving upward every day, so their positions will change as we go forward, but the levels will remain established.

Now that we have a good grasp of the long-term outlook for the market, let's see what's in store for the near future.

On the Daily Chart we can better see the trend lines that are creating resistance to any further gain. It would be a strong market that would cause a price rise beyond these trend lines. It's possible! The momentum indicator has risen to a new high over the last two days and shows no deceleration. The McClellan oscillator, which measures breadth, also made a new high, but it is not nearly as strong, and its performance over the next few of days will be revealing.

SPX daily Chart
Larger Image

NYSE McLellan Oscillator

If the McClellan oscillator makes a new near-term low, the SPX will then be in a position to threaten the 1395 support level.

On the Hourly Chart, we can see more clearly that it would take the breaking of two minor trend lines before the SPX could challenge the intermediate one which starts at 1267. This means that an important sell signal is not likely to be imminent because each trend line should provide some support.

As for the near-term, the hourly momentum indicator has a distinctly different look than the daily.

I have placed an hourly oscillator of the A/D (courtesy of Qcharts) under the price chart. It does not match prices exactly on a time basis but it's close enough so that you can tell that the previous positive divergence, and the current negative divergence correspond to that in the momentum indicator and reinforces its signals. Currently, the A/D oscillator has made a bearish cross in the two lines but, like the momentum indicator, it is still positive and has not yet given a sell signal.

SPX Hourly Chart
Larger Image

There is a P&F rule that says that before you can break a support level, you need to make a distribution pattern which is at least as important as the accumulation level which is being challenged.

If this holds true in this case, we will need to make a distribution top which is at least 90 to 100 points across. If the SPX works as fast making a top as it did to create this accumulation level, it would take at least two weeks before we are ready to sell off. Something to keep in mind!


Cycles

There is a 14/15-wk high-to-high cycle which was once very dominant but less so lately, that is due toward the end of next week. It could bring an end to this phase of the rally.

The dominant 66-wk cycle mentioned above is now about 75% in its current phase and, with each passing week, will exert more and more downward pressure.


Breadth

The Summation Index (courtesy of StockCharts.com), its RSI, and its MACD are all displaying negative divergence to the SPX. This is bearish! The NYSI has gone flat while the market made a new high. It looks as if it found temporary support on its 50-DMA and this is giving it an opportunity to make a third top (which is even more bearish than a double-top) which it will complete unless the A/D starts to display a lot of strength. Let's see where we are a week from today!

NYSE Summation Index


Sentiment Indicators

The long term reading of the SentimenTrader (courtesy of same) is now about 20% on the bearish side of neutral. It will have to be far more negative than that to warn that we are approaching an important top. It is currently telling us that it is not yet time to mortgage the house and go short!

The short term reading is just a little more bearish but may have to move lower before we put an end to our current rally.

Sentiment

The VIX

For the past few weeks, I have been showing the XIV vs. SPX (courtesy of Qcharts). Today I am going to show VIX instead. Both XIV and VIX appear to have gone through an abnormally high volatility period, but it does not have much effect on the way that I use these indices. VIX is showing very clear relative strength to SPX which is the reason I chose to show it. In the past, such clear divergence - a new high in the SPX, but a higher low in the VIX - has always led to a top in the market.

Divergence being displayed on hourly charts normally leads to a short-term top. This time, however, the divergence also exists on the weekly charts, and that may have a more significant meaning. I don't take a single indicator seriously unless what it says is being supported by several others. There is support for the view that we are near a short-term top, but it is still difficult to make the case that the market is about to make a significant top.

VIX
Larger Image

XLF (Financial SPDR)

XLF has been one of the weakest participants in the bull market. Its recovery from 2009 has, to-date, been less than 50%. Its decline from the March top was proportional to the SPX, but the recovery from the June low was lagging slightly. Last week's ECB announcement gave it a shot in the arm and, since then, financial stocks have been some of the best performers. XLF's performance on Friday, which was relatively stronger than the SPX, was one of the reasons why the latter -- which is made up of a high percentage of financial stocks -- helped SPX to outperform.

If XLF remains strong, it will help SPX continue to outperform the Dow and QQQ. However this should not alter the projections delivered by the P&F counts across the SPX base. What it could do is slightly increase the disparity of performance between the SPX and other indices. Over the short-term, XLF has a similar chart pattern to that of the SPX. We'll see if that holds up.

XLF
Larger Image


BONDS

TLT (124.03), which was born in July 2002, made a new all-time high (132.22) as recently as 7/25/12. Since then, it had a fairly mild if precipitous correction to a good support level buttressed by its 200-DMA. It then rallied precisely .618 of its correction (seven and a half points) and has again pulled back four points to 124.

So far, this looks like the beginning of a consolidation rather than an important correction, and TLT may be preparing to extend its move to 137 when the stock market begins to correct in earnest. This is a P&F count projection derived from the recent consolidation at the 117 level. It's also possible to get a count to about 144 from the same base. These counts may only be intermediate-term counts. Over the long-term, TLT may possibly go even higher.

For now, in order to achieve its projection potential, TLT will have to continue the moderate consolidation which is currently underway, and especially hold above its 200-DMA which presently runs at about 120. That looks very feasible.

TLT
Larger Image

UUP (Dollar ETF) Daily Chart.

UUP has been affected adversely by the euro strength which resulted from the ECB announcement. But it was already in a corrective mode in anticipation of that event and, last week, it simply pushed a little lower through its support level and broke below its 200-DMA. It also broke through a year-long intermediate trend line.

UUP
Larger Image

While this appears to be very negative for the index, much will depend on whether or not it can steady itself in this area. As long as it does not break below the strong support at about 21.80, this downtrend will turn out to be short-lived. In touching 22, it may have filled a minor P&F projection which allows for another possible one or two points on the downside. Last week's action looks like an exhaustive move with a gap while positive divergence has formed on the momentum indicator. These could be the signs of a hold and perhaps a reversal in this area.

If UUP is to reverse from here, it must begin to show some strength right away and get back above its 200-DMA. It has done that twice in the past year and went on to make a recovery high.


GLD (ETF for gold)

As I pointed out last week, there is a lot of similarity between the charts of UUP and GLD - but in reverse! Both have broken a year-long trend line, overcome their 200-DMA and, last week appeared to have formed a small climactic move with an exhaustion gap while creating divergence in their momentum indicator - in GLD's case, negative divergence.

Like UUP, GLD has reached a minor P&F target at 169 which has the potential of going one or two points higher. This would fill an important phase count which, in conjunction with other technical conditions could end the rally around this level. However, GLD has created a P&F base which is capable of sending it to 172 perhaps even challenging its former high of 185.

How it corrects from this level will determine if it is capable of rising to its next projection of 172. Since the 25-wk cycle is still in its early stages, it has a decent chance of meeting that target. If it does rise to 172 but can go no farther, it may continue to build a major base from which it can eventually make a new high. We can get additional guidance by coordinating its future action with that of UUP and FXE.

Gold
Larger Image


OIL (USO)

USO has reached its assigned 36 target which coincided with a strong resistance, and is either consolidating in order to extend its move, or it is forming a top which will soon lead to the beginning of a decline. It is currently challenging its short-term trend line and its momentum indicator which has held at neutral and could signal the start of that decline by becoming negative. We need to wait a little longer to see in which direction the USO will break.

Oil
Larger Image


Summary

After forming a two-week consolidation, the SPX broke out on the upside and made a new bull market high of 1437. Since the consolidation base includes a phase projection of 1439-1440, it could be very near its first meaningful near-term correction. However, there are higher potential targets that must be kept in mind, especially the next important one which is 1446-1449.

If 1440 does not bring about a serious correction, 1446-1449 should; perhaps including the possibility of ending the intermediate trend which started at 1267.

 


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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.

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