Market Turning Points

By: Andre Gratian | Sun, Oct 14, 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 has made a double-top at 1471. Should it remain unchallenged, a decline into January is possible.

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

On 9/14, SPX made a bull market recovery high to 1474, corrected to 1430, and then failed to make a new high in its next rally. This created a potential double-top from which the index has now declined to 1427, resting on a strong support level which is made up of two bottom channel lines, a former top, and the 50-DMA. Considering the fact that positive divergence has appeared in a number of daily and hourly indicators, it would be surprising if the index declined much farther without rallying first.

When it does rally, the quality of the rally will tell us if the market position has changed substantially over the past month. There are several potential scenarios ahead: (1) SPX still has enough strength to recover from this period of weakness and continue its rally to a new high. (2) It has started a correction which is just beginning and could develop into an intermediate decline that will retrace a large portion of the uptrend from 1267, and perhaps even from the October low of 1075. (3) It will make an extended but fairly shallow consolidation pattern. The odds that 1474 represents a major top and the end of the bull market are not very good.

If the index chooses option (3), it could limit its downside to 1371. This would represent a 50% retracement of the uptrend from 1267 to 1474, finding strong support at the May top of 1370. It would also coincide with a 23.6% retracement of the trend which started at 1075. At this time, this looks like the best option. In past issues, because of the current cyclical configuration, I discussed the probability of a top forming in the August/September time period. The implementation of QE3 by the Federal Reserve extended the top beyond that time frame, but you can't keep up forever a good cycle that wants to come down. I believe that, at this time, the most influential cycle is the 66-wk cycle whose low is due in the first week of January. Therefore, it would make sense to use it as a time guide for the correction which has just started and expect a S&P 500 decline down to about 1371 by early January. Naturally, we'll make the necessary adjustments as the downtrend unfolds, and pin-point the various phases which make up the larger trend.

After the incipient rally is complete, we should have a good Point & Figure pattern from which to verify the extent of the entire correction which lies ahead of us.


Chart analysis

We'll start by taking a look at the strongest of the three indices that we will cover: The Dow Industrials. This 4-hour chart depicts its uptrend from June 4th to the top which, in the case of the Dow, was made on 10/05 when it managed to make a fractional new high before reversing.

Like the SPX, its uptrend has created a well-defined channel; the difference being that while SPX has already reached the lower (green) channel line, the Dow is still above it -- which makes it a little stronger. One would expect prices to find support on the bottom trend line. There is also a small red channel which defines the correction, and the DOW has already reached its bottom line. Besides that, support is drawn from the August 21 peak and from the 50-DMA (not shown here) which is currently running a few points below Friday's low.

Turning to the indicators, we find that the Stochastic RSI is oversold and beginning to turn with its two lines starting to make a bullish cross. Above, the CCI has flattened out and the histogram is beginning to make a rounding bottom. These are signs of the deceleration process which appear toward the end of a trend, just before a reversal.

Dow Jones 4-Hour Chart
Larger Image

Next, we'll show the 4-hr chart of the Nasdaq 100, the weakest of the three indices! Unlike the DJIA, NDX has broken below its up-channel line, but it has reached the bottom of the correction channel which coincides with the 200-?MA. Should it drop a little lower, it will find support from the grey trend line across the two bottoms. NDX has broken below its 50-DMA, so it won't get support from it, but it is benefitting from positive divergence in the CCI and histogram, and is extremely oversold in the stochastic RSI. The conclusion is the same as above: an end to the first phase of this correction should be near.

NDX Jones 4-Hour Chart
Larger Image

SPX Hourly Chart
MACD Chart
Larger Image

One more chart completes the trio displayed: an hourly chart of the SPX which I have enlarged to show more clearly the various trend lines providing support for the index in this area. Here, we have 3 channels whose lower trend lines offer support for the price: the main up-channel and two down-channels which outline the consolidation pattern.

There is also support from the August peak, and from the 50-DMA which is not shown here. The oscillators are at about the same position as the previous two charts, but below this chart I have inserted an A/D oscillator (courtesy of Qcharts) which mimics the McClellan oscillator on an hourly basis. It shows much more positive divergence than that displayed on the momentum indicators.


Cycles

It looks as if the longer cycles are finally taking control and it is reasonable to expect a decline into early January 2013.

Near-term, there is a short-term cycle bottoming next week which is perfect for the anticipated rally that is showing in the indicators.

There is a cluster of cycles due in mid-November which could put some additional pressure on the decline into that time zone.

Longer-term, the 66-wk cycle should lead prices lower into early January.


Breadth

The Summation Index and McClellan oscillator (courtesy of StockCharts.com), are shown below.

The NYSI is showing a mild decline to the level of its former near-term lows and it is still holding above the 200-DMA. The MACD has gone negative, but only by a small margin, and RSI is entering the oversold area. None of this demonstrates a serious decline.

Below, the NYMO never went very far below the zero line, and it has held above the green line which marks the levels from which mild declines have reversed. It is now showing deceleration and positive divergence, adding to what was discussed above with regard to the momentum indicators.

NYSE Summation Index Chart

NYSE McClellan Oscillator Chart


Sentiment Indicators

With the decline of 43 points in the SPX, the SentimenTrader (courtesy of same) has already returned to neutral. That is one of the reasons I am not too keen on calling for an extended decline from this level, and why I have chosen option (3) among those discussed above.

Sentiment Indicators

VIX

VIX does not show a strong inclination to get back into an uptrend. This gives us another reason for thinking that the current correction will be limited and that a reversal will soon take place. The inability of this index to rise above its former near-term high shows that there is still some indecision about the near-term trend of the market. Only when VIX has traded above 18-19 can we be confident that a worthwhile correction has started.

VIX
Larger Image

XLF (Financial SPDR)

Even with Friday's corrrection, XLF is still in an uptrend and holding above a channel trend line as well as above another longer trend line from June 4th. The pattern exhibits relative strength to the SPX and, like VIX, creates doubts about the weakness inherent in the current correction. Both VIX and XLF are among some of the most accurate leading indicators and what they are telling us should be respected. They are warning that we should not get overly bearish about the market at this time.

XLF (Financial SPDR)
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BONDS

TLT has taken advantage of the equities market correction to rebound strongly from the low of its own correction. That was enough to take it out of its red channel, but it may not be enough to drive it outside of a larger (blue) channel. Friday, it closed at the intersection of two internal trends.

TLT
Larger Image

Lines (blue and green) and, especially if the market shows a tendency to reverse, it should end its rally at about that level. This is somewhat substantiated by the indicators. The lower one is overbought, and the top one is showing some negative divergence. However, neither has started to roll over, so there could be enough strength left in TLT to get up to the top of the blue channel before ending its recovery rally.

UUP (Dollar ETF) Daily Chart.

UUP looks as if it is making a consolidation in a downtrend and could soon be vulnerable to making a new low. At the very least, it should re-test its low and prove that it can hold that level. Breaking out of the red channel simply meant that a down phase had been completed. Now, another one may be ready to start.

In order to get back into an uptrend, UUP will have to show that it is capable of coming out of the blue channel. That is not likely until more work at the bottom has been done.

Dollar ETF
Larger Image


GLD (ETF for gold)

In its current position, and if the market goes up and UUP comes down (both good prospects), GLD will have the opportunity to make another stab at those resistance lines which have stopped its upside progress. It may even be able to reach its 177 projection, before starting to correct again along with the market when its bounce is over - assuming that this is all it does! A little more work on the upside would expand the distribution top and take it closer to the half-way point of the 25-wk cycle.

If GLD has another down-phase to the 149 area and reverses once again from that level, it will complete a rectangle pattern. If so, the odds of breaking through the top will have improved and a measured move could then take it above 200. This is something worth monitoring, but much could happen to alter the current formation into something totally different.

Gold ETF
Larger Image


OIL (USO)

Oil ETF
Larger Image

USO is now trading between two parallels to the top downtrend line, perhaps beginning to repeat the pattern that it made just prior to its 41 high. Should it make a similar formation, it could then go and challenge the top of the red channel before resuming its long-term downtrend.


Summary

From last week's Summary:

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

Indeed, last week did suggest that SPX and DJIA made a double-top, while NDX appears to have created a confirmed H&S formation.

Many positive divergences, especially in the A/D indicators, suggest that a short-term reversal is near. That would give the SPX and DJIA the opportunity to retrace 50% or more of their decline, while NDX could have a standard rally to the neckline of its H&S pattern.

 


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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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