Market Turning Points

By: Andre Gratian | Sun, Oct 21, 2012
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FINALLY ROLLING OVER!

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 now made a triple top, which is a bearish pattern. For confirmation of a downtrend, it will need to close below 1420 on a daily basis.

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's summary: "... 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."

The SPX made another try at reaching a new high, but it ended in another failure! Meanwhile, the NDX confirmed its Head & Shoulder top pattern by rallying to the neckline and reversing sharply. This implies that the longer-term cycles have finally overcome the QE3 effect that had delayed their topping action, and that the indices are in the process of establishing an intermediate top.

Friday's strong sell-off is likely to be followed by additional, but limited, downside action early next week. Both SPX and DJIA are again approaching the same level of strong support which curtailed their former declines, and NDX is nearing its initial H&S projection which corresponds with the rally peaks established during July. All three indices are also very oversold short-term and ready for a bounce to relieve that condition. Since it failed to hold 1432, it is likely that SPX will fill a maximum P&F projection to 1421/1425 before rallying.

The correction which has been underway since SPX made a high of 1474 in mid-September is only expected to be another consolidation phase for the bull market which started in 2009, and not the beginning of a long-term reversal. In the last newsletter, we established that, from a time perspective, the decline could continue into January 2013, while the minimum -- and probably initial -- downside projection was estimated to be about 1370. A Fibonacci measurement from the top is already establishing this target as plausible, but we'll have to wait until the next rally in the SPX to give us a more accurate P&F projection.


Chart analysis

Once again, NDX has led the market in a correction; this time by establishing a well-defined H&S pattern. While the DJIA made a fractional new high, and SPX got within 3 points of its former high, NDX formed the right shoulder of the pattern and, on the subsequent decline, broke through the neckline. Then came the traditional rally to the neckline followed by a 3-day decline which has almost reached the initial pattern projection. It's interesting that the histogram appears to be making an inverse H&S pattern of its own, with the right shoulder showing positive divergence -- even though it is still declining - suggesting that a near-term reversal is just ahead of us.

Besides being close to fulfilling its projection, NDX is also nearing a 50% retracement of its uptrend from early June; and look at the support immediately below! It's going to be difficult for the index to make much more headway on the downside, at least over the short term, especially with the 200-DMA just a few points away.

NDX Daily Chart
Larger Image

As I mentioned in the last letter, the DJIA is the strongest index. This can be seen readily in the daily chart (below), especially when it is compared to the NDX (above). The Dow has started to correct in an orderly manner which, so far, is still contained within its rising channel from the June 04 low. It is also about to reach the support which stopped the previous decline. Even if it were to continue down to the bottom of its corrective channel, that would only be about another 100 points or so.

The histogram (at the bottom of the chart) is making the same inverse H&S pattern that appears in the NDX indicator, with the same connotation: the decline is about to come to an end.

DOW 30 Chart
Larger Image

Now we'll take a look at the hourly chart of the SPX, below which I have positioned an hourly breadth indicator. All the indicators are very oversold with the A/D oscillator reaching what is considered an extreme condition which is seldom surpassed. This, as mentioned above, should lead to a recovery over the near-term.

S&p500 Daily Chart
Larger Image

The price chart is very similar to that of the DJIA, having reached the bottom of the channel and a support area which contained the last decline. We also notice that the index is now in the 5th wave of a 5-wave pattern (nothing to do with EW labeling) from the 1474 high, and it is normal for a move in the opposite direction to take place after this type of pattern. Another 8 or 10 points on the downside would also fill the most extreme count derived from the small distribution pattern in the 1457 area.


Cycles

I can only repeat what I stated last week: "It looks as if the longer cycles are finally taking control and it is reasonable to expect a decline into early January 2013."

The short-term cycle which bottomed last week provided the anticipated rally.

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.

(Most of the above is a repeat of last week's comments because they still pertain to our current condition.)


Breadth

The NYSE Summation Index and McClellan oscillator (courtesy of StockCharts.com), are shown below. The last price rally is almost invisible on the NYSI, an indication of its lack of underlying strength. It barely created a tick sideways before the index resumed its downtrend. While that denoted weakness, a number of things are suggesting that the decline may be just about over: the NYSI is holding above its 200-DMA, and the RSI has reached an oversold level and has started to turn up. Most importantly, the NYMO is less than 20% negative and far from its low, a condition which is creating some significant positive divergence if this continues. Of course, the conclusion could be premature since it is still dropping, but in view of everything else that has been noted about the current status of the indices, the positive divergence is likely to remain and create another warning that a near-term reversal is about to take place.

NYSE Summation Index

NYSE McClellan Oscillator


Sentiment Indicators

I continue to show the SentimenTrader (courtesy of same) next to the previous week's, so that we can get a sense of trend in sentiment from which to evaluate the market. Note that the most bearish reading was on September 21, one week before the market top. Since then, as the market has started to correct, the readings have moved out of the negative zone and, for the past two weeks, the long term signal has gone neutral while last week, for the first time in 5 weeks, the short term indicator has turned bullish. This progressive picture of the SentimenTrader is not very bearish for the market and confirms what I suggested above: a moderate intermediate correction lies ahead.

Sentiment

VIX

The past week's decline appears to have awakened the VIX and, for the first time since the September low, it has managed to overcome a former high - even though the move is still looking tentative because the index did not close on its high of the day. For the sake of the P&F chart, a confirmed breakout will not occur until VIX trades at 18 and above. This could very well take place next week.

The P&F base count renders a potential projection to 27 - forecasting a noteworthy correction in the indices if it materializes.

VIX
Larger Image

XLF (Financial SPDR)

Financials continue to outperform the principal market indices. This is obvious in the action of the XLF which did not show anywhere near the weakness of the SPX last week. However, If the market correction becomes severe enough, it will not stay in an uptrend but break outside of its channel in a corrective move as well. For now, its relative strength is another indication that - at least initially - the market correction should be benign.

XLF
Larger Image


BONDS

TLT remains in a long-term uptrend as long as it does not trade below 110. For the time being, after making a new high, it has started what looks like a consolidation pattern. It met with an initial P&F projection target of 118 six weeks ago and has held above that level since. There is a larger count that could take it down to the former low of 111. With equity indices starting a correction, it's possible that it will continue its move in the opposite direction. If it breaks out of the blue channel on the upside, we'll see if it is capable of making a new high. There is an unfilled count to 137 which could still be reached if TLT continues to hold these levels and resumes its uptrend.

If it does break out but fails to make a new all-time high, it will be an indication that a major top may be forming.

TLT
Larger Image

UUP (Dollar ETF) Daily Chart.

UUP took a hit when ECB's president came out with a strong statement to protect the euro at all cost. That was five weeks ago! During that time, the index appears to have stabilized and it has begun to build a base. Particularly suggestive was the fact that a couple of days ago it re-tested its low and bounced up smartly, indicating that there were buyers at that level. If this turns out to be a successful test, then the consolidation of UUP is over and it will soon start to move up and break out of the blue down-channel. This would be consistent with the beginning of a correction in stocks. Note that the indicators have also turned up but, more impressive, the histogram quickly turned positive and has remained so during the entire basing formation. Let's give UUP a little more time to see if it is able to rise above 22. Even if it does, it will have to overcome its 200-DMA which now coincides in time with the top trend line of the blue channel. Going through that would really be bullish for the dollar and bearish for equities - AND GOLD!

US Dollar Index
Larger Image


GLD (ETF for gold)

GLD has an interesting chart which, fortunately, makes it future action fairly predictable. The graph below represents the time period from GLD's high of 186 to the present - a long consolidation period which does not appear to be over.

After making an important base above 149, the index started an uptrend which broke out of a major downtrend line at about 162, and continued upward until it met with resistance at 174 and could go no higher. It has since retraced to 167.

The resistance at 174 was three-fold: at a former top, at the top of a small rising channel, and at the parallel to an internal trend line (top blue). Identifying internal trend lines is important and this one, with its 5 contact points definitely deserves attention. By drawing a parallel to that bottom trend line from the 186 top, we form a blue channel that could turn out to be more accurate at defining the correction that GLD is undergoing. Note that the top blue channel line coincides with the other two areas of resistance which stopped GLD's advance cold! I should also mention that if GLD manages to go through the top blue channel line, it will most likely be on its way to making new highs. Until then, it will have to overcome the downward pull of the 25-wk cycle which appears to have peaked.

Gold 2-Day Chart
Larger Image

On the way down to the low of the cycle, there is plenty of support for GLD. Various levels, starting with the (green) rising channel bottom line, are likely to be tested and the higher the level that the index is able to hold by the time the cycle has made its low, the more bullish it will be for it.

What happens after the 25-wk cycle makes its low will determine the future of GLD on an intermediate and perhaps long term scale.


OIL (USO)

Ever since USO met its 37 objective, I have been dubious of its ability to go higher. The action since then appears to confirm my suspicions. USO has been stuck at the bottom of the parallel to the top downtrend line which has offered initial support. If the markets begin to correct (as is anticipated) USO is very likely to go lower. Should it make a measured move with regard to the first declining phase from 37, this would bring it down to 28 -- which is also what the P&F chart count suggests. This should be a powerful hint where UUP is going to end up if it breaks below the supporting trend line.

Oil Daily Chart
Larger Image


Summary

Portions of last week's Summary were quoted in the opening remarks. They correctly predicted the path of the SPX for the past week.

We now have good technical reasons to believe that the anticipated correction into January 2013 is about to get underway. The original forecast called for a cyclical top in September and, although it took a while for the cycles to assert themselves, we should note that the September peak of 1474 has not been exceeded.

We have also concentrated our attention on VIX, stating that when it started an uptrend, it would confirm the beginning of an intermediate market correction. This appears to have begun last week with a move past a former short-term peak. A final confirmation will take place when its P&F chart is able to print 18.

 


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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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