Market Turning Points

By: Andre Gratian | Sun, Oct 7, 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 - The Fed has extended the SPX intermediate uptrend.

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

From last week: "What we can say, is that if the lesser of the two projections turns out to be correct, there is a good chance that the market will resume its uptrend after the correction."

From the 1474 level, there were two possible projections. The first one to 1430 was reached quickly. After a few days of consolidation, some minor bottoming cycles were expected to take the SPX down to the second one at 1424. It did not take place! A secondary trend line was tested 6 times, finally briefly giving way as the cycle bottomed last Tuesday, but the index closed above it and that cinched the end of the correction. Since then, SPX has rallied to a phase projection at 1471 on Friday, where it met some strong resistance and closed ten points below and slightly negative for the day.

Next week should determine if this was a successful test of the 1474 high -- putting an end to the rally from 1267 -- or, if only a mild correction ensues, followed by a resumption of the uptrend. The previous low of 1430 would have to be breeched to mark the beginning of a substantive correction. The odds of this taking place will increase if we have some significant weakness on Monday. At this time, the Dow industrials is the strongest of the three indices.

NDX is the weakest, primarily because of the 52-point sell-off in AAPL from its high of 705 two weeks ago. On Friday, the stock closed at 652, on an intermediate trend line which originated on 11/25/11. Holding that trend line could be the most significant determinant of the market trend next week. When it made its high, AAPL created a distribution pattern which gives it a potential decline to 625. If the stock breaks its trend line on Monday and decides to drop another 27 points over the next few days, it will surely affect NDX and the rest of the market. If SPX declines to a critical level, it could mean the end of the rally. But THAT remains to be seen!


Chart analysis

We'll start by analyzing the Weekly Chart of the SPX starting with the October 2011 low. The chart is pretty straightforward consisting of uptrends and consolidations describing a series of unbroken higher highs and higher lows. As we pointed out last week, the last uptrend phase fits nicely between two parallels, forming a rising channel whose bottom trend line has remained unchallenged for 10 weeks. But we are beginning to see something in the oscillators that this may be about to change. All three have started to roll over, an indication that the uptrend is beginning to decelerate. This is caused by the fact that the 1474 high of four weeks ago remains intact. On Friday, we got close to it, but had a significant pull-back into the close. Unless we can establish a new high next week, we stand a chance of reversing the trend from 1267.

SPX Weekly Chart
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NYSE Summation Index

Now, let's talk about the NYSI, an indicator which shows us how well breadth is supporting price over the intermediate term. The chart shows that the deceleration taking place in the NYSI is far greater than in the SPX and that the former has broken through the uptrend line from its last low. However, it appears to have found support above its 50 and 200 DMAs, and its RSI may be leveling off at the 50% level. This is not enough to say that an intermediate decline has started, but it is enough to say that we could be very close to doing so. If the NYSI turns back down, it could signal an intermediate reversal in the stock market.

Let's skip the daily chart and move directly to the Hourly SPX so that we can assess Friday's action more clearly. I am going to concentrate on the most recent period and search for signs of developing weakness.

From 1474, SPX corrected down to its initial target of 1430 and started a gradual recovery, finding resistance at the downtrend line and pulling back with the bottoming cycle, but staying well above the 1430 low. When the cycle reversed, the index turned up once again, met with brief resistance at the trend line, but finally broke through and rose to 1471 where it met with stiff resistance. This caused it to pull back sharply and create a potentially negative chart pattern.

On the way down to the 1430 target, the index found support on a (blue) trend line from 1330, from a former low, and from the 200-hr MA. That proved enough of a floor to keep it above its correction low, in spite of the bottoming cycle. The price action from 1430 to 1471 has formed a small channel which will have to be exited on the downside if 1471 is to remain a successful test of the 1474 high. That may not be so easy to achieve! Let's see what it requires...

The pull-back from the top came to rest on a channel parallel drawn from 1430. Because the indicators have given a sell signal and are still declining, it is likely that the pull-back will continue to challenge the bottom of the green channel, where the price will have retraced about 50% of its uptrend from 1440, and will find support, once again, on the secondary blue trend line. If that does not stop the decline, support will come around 1448/49 which is a .618% pull-back from 1440 to 1471, and is also a minor P&F projection target from the 1471 top. In addition, at that level the index will also meet with the grey trend line from 1400, and the (green) extension of the downtrend line from the 1471 top. If THAT does not stop the falling price, 1440 should provide the next level of support because it is a former low, and this is also the level at which the 200hr MA will be on Monday.

SPX Hourly Chart
Larger Image

The reason why I have gone through this detailed analysis is because it shows how many opportunities the SPX will have to find support instead of continuing its decline and, on the other hand, how decidedly negative it would be if all that support is penetrated in one fell swoop.

Now, I want to show you a chart of the QQQ, because it is weaker than the SPX and it may be the leading index.

QQQ Hourly Chart
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QQQ Hourly Chart

I won't repeat the detailed analysis which I made of SPX, but point out only a few relevant features. Over the longer term, QQQ stopped its rally well short of the September top, and it has already pulled back to the level of the early September low. Over the near-term, the entire rally from the cycle low is weaker and looks very much like a bear flag.

I have also placed the hourly A/D indicator (courtesy Qcharts) below the price chart. On Friday, it turned down after showing some divergence to price, and the histogram went negative. I have never seen this index reverse - in either direction - without the histogram decelerating, first. As of the close, it was still accelerating, suggesting that we could see some additional weakness on Monday.

That does not mean that these are the signs of a significant reversal. If next week does not bring continued weakness, we could consolidate at this level and continue the uptrend. But this is where AAPL can make a difference. If it continues its decline on Monday to the full extent of the 27 remaining points down to its 625 target, how can QQQ not be in danger of breaking below 68.00 and, if it does, how can SPX and the rest of the market remain impervious to this weakness?

Friday's action has created a possible scenario of continuing weakness which could evolve into an intermediate reversal.


Cycles

The cycle bottoming last week failed to bring about the anticipated weakness in the SPX down to 1424. But we may get another chance to impose a temporary limit on the index's attempt at making a new high. Another small cluster of cycles is due in the second week of next month, and it should have a little more clout than the one which bottomed last week. Perhaps this is the reason for the warning being given by QQQ.

Taking a longer term perspective, we knew that some important cycles were due to roll over in August or September. Why have they, so far, been so ineffective at turning the market? One obvious reason is QE3, but there could be a cyclical reason as well which I failed to take into consideration. The 2-yr cycle (which bottomed in April) is deemed to be behind the current rally from 1267. Historically, its influence on prices has always been far greater during bull markets. The 4-yr cycle is in the process of topping and its downward pressure will increase over time but, for now, it's not enough -- even with the assistance of the 66-week's down phase -- to counter the upward push of the 2-yr cycle. At some point, we will develop equilibrium between the opposing forces. The market will tell us when that moment has arrived.


Breadth

Since I have already shown the Summation Index above (courtesy of StockCharts.com), I'll simply post the McClellan oscillator here. Well... it does not look so hot! The SPX came close to making a new high on Friday, and this oscillator just barely poked its head above the zero line. The red channel that I have drawn also indicates that the index is in a downtrend and, under these conditions at the very least, one would expect some pull-back in the indicator and in the market as well. How much pull-back? That's the sixty-four thousand dollar question (which should be adjusted for inflation).

NYSE McClellan oscillator

Sentiment Indicators

This indicator could be the fly in the ointment of an intermediate reversal forecast. The SentimenTrader (courtesy of same) is refusing to drop to the level of excessive optimism necessary for predicting an important top. Could it be wrong? I am not ready to bet on it.

Sentiment

VIX

VIX continues to move back down to 14 every time that the market rallies, creating a lower high each time. As long as it continues to make that pattern, the market should continue to rally. Only when VIX has managed to overcome a former high and follows with a higher low can we state that the market has reversed.

Unless VIX decides to break below 14, this cannot be too far off, as the new near-term peaks are getting more and more within reach. The last short-term high was 17.07. If VIX gets above that, we can start thinking market reversal.

VIX
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XLF (Financial SPDR)

XLF - Financial SPDR
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This is an hourly chart of XLF for the same time period as the one of the SPX which is shown above. It looks about the same, with perhaps a little relative weakness asserting itself. That could be misleading because XLF exceeded the performance of SPX as a result of the QE3 announcement and is now simply narrowing the gap. Over the near-term, XLF is in sync with the SPX.

AAPL

Since we discussed AAPL earlier and its potential relevance to the short-term maket direction, Let's take a look at the daily chart.

On Friday, the stock made a new short-term closing low and came to rest on the intermediate trend line from last november. If it breaks below, it could quickly reach its 625 target, where it will also find support from a shorter (blue) trend line drawn across the last two lows, as well as from a support level extending across former short-term peaks.

The daily indicators have been declining since before the top of the move after showing some negative divergence. They are now oversold but have not turned up, which allows for a continuing decline and some positive divergence manifesting itself before they reverse.

The lower green trend line is the long-term trend line which goes all the way back to the beginning of the bull market in 2009, and which seems to be rising at the same rate as the 200 DMA. It is unlikely that the stock will challenge it over the short-term.

More likely, this is only a temporary correction for the stock. The Point&Figure chart gives it a potential to rise into the 800s before it makes a long-term top - perhaps at the same time as a top in the bull market?

AAPL Chart
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I just discovered that there is a VIX for AAPL. At first glance, I have not seen anything that comes close to resembling the correlation between the VIX and the NYSE. I don't see much point in pursuing its study.


BONDS

TLT is still consolidating and has retraced to 121. It does not look quite ready to resume its uptrend and there are potential lower counts to about 115.

TLT Chart
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UUP (Dollar ETF) Daily Chart.

The dollar is building a small base that would, when complete, allow it to have a 50% retracement of its recent downtrend - if it can manage to remain above its recent low.

Dollar ETF Chart
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GLD (ETF for gold)

GLD has moved just a little higher to 174, and pulled back without being able to overcome the overhead resistance between 174 and 176, even though the P&F chart gives it a possible phase count to 177. If the market starts to correct, GLD should give up the attempt and start to correct also.
But we should keep in mind that recently, GLD has formed enough of a base to take it back up to the former highs if the full count is expressed.

GLD - ETF for Gold Chart
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OIL (USO)

USO will have to do more work before it can show anything interesting, technically. Odds still favor a continuing decline down to about 18.

OIL (USO) Chart
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Summary

"The second best scenario would be to hold above 1430 before resuming the uptrend."

Last week, the SPX chose the second best scenario and, after the cycle had bottomed on Tuesday, rallied; but failed to make a new high.

When the market is in a corrective move - in which it has been since 9/14 - there are always several courses of possible future action. On Friday, SPX met with some stiff resistance at 1471 and NDX had a key reversal. This normally indicates that more selling is ahead. It does not necessarily mean that there was a successful test of the high, although it is possible that both SPX and INDU made a double-top. It may also mean that more consolidation is needed before resuming the uptrend.

Next week's action should go a long way towards clarifying the current market position.

 


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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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