Market Turning Points

By: Andre Gratian | Sun, Oct 28, 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 triple top, which is a bearish pattern. It has now given a strong indication that an intermediate correction is underway.

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

Since the (probably intermediate) correction started in mid-September, the NDX has retraced slightly more than 50% of its uptrend from 6/04 with Friday's close being precisely on the 50% retracement line. During the same time period, DJIA retraced exactly .382, and SPX .35. That makes NDX the weakest and SPX the strongest of the three indices. NDX has been adversely affected by the correction in AAPL and in the semi-conductors. SPX, has been buoyed by a relatively stronger financial sector.

There a is strong possibility that the market is ready for its first counter-trend rally (excluding the two rallies that created the triple-top in SPX). Here is why:

Other factors include the fact that NDX has met its initial H&S projection and is finding support on its 200 DMA and all three indices are holding an important support level but, most important to turn around the NDX, the semi-conductor sector may have concluded its correction and is about to attempt resuming its uptrend AND, AAPL may have ended its 100+-point correction with a selling climax and reversal on Friday.

I could continue ad nauseam making the case for a short-term reversal of the market trend, but the reasons given should be enough to convince the skeptics. The following analysis will be devoted to graphically demonstrating the points made above.


Chart analysis

We'll start with NDX. The H&S patter is obvious! After breaking support at the neckline, the index had a typical rally to the neckline and continued down to meet its initial projection on 10/23. After that, the index drifted lower until Friday, while APPL was completing its correction. Since the top of the right shoulder, NDX continued its correction within a well-defined channel, reaching the bottom channel line six days ago, and crawling along it for the next five. On Friday (while AAPL was having a small selling climax following its earnings report of the previous day) NDX briefly reached outside of its channel line to touch its 200-DMA, found strong support, and bounced back immediately. Note that during this time, each day the index was making slightly new highs and new lows keeping its decline alive, but on Friday, it closed up for the day.

In the meantime, the indicators started to flatten out and even turn up. Positive divergence is evident in the CCI and Histogram, and on Friday, the Stochastic RSI lines made a bullish cross.

Everything considered, there is a strong possibility that NDX made the low of an interim corrective phase on Friday.

NDX Daily Chart
Larger Image

If NDX is about to reverse, it stands to reason that the other indices will follow since it tends to lead the market. So let's spend a little more time looking at other reasons for NDX to turn its short-term trend around. We'll first look at a chart of Apple.

AAPL also made a H&S top, briefly found support on the neckline, then broke through it at the same time that it broke below its (grey) trend line from the Oct./Nov. low. It briefly found support on a (blue) trend line drawn across the last two short-term lows, and this gave it enough of a bounce to make the normal return move to the neckline. After that, it resumed its downtrend by breaking through the short-term trend line, and it looks as if it experienced a selling climax on Friday (validated by the volume spike), finding support at the bottom of its short-term down channel and, more importantly, on the long-term trend line which goes back to the beginning of the bull market in 2009.

If the proposition that this stock is ready for a short-term reversal is correct, it will benefit NDX, since AAPL purportedly provides about 20% of the price move of NDX.

AAPL Daily Chart
Larger Image

Finally, for good measure, let's analyze the chart of SMH (semiconductor ETF). Both AAPL and SMH are still long-term bullish due to the fact that they have yet to make a lower low in their long-term uptrend. Breaking an uptrend line is only the sign of a potential correction. It has to be followed by trading below a former low to be called a trend reversal. Using these criteria, both AAPL and SMH are still in long-term uptrends.

The semi group made a bull market high in March and started to correct. SMH's correction ended with a higher low on June 04 than its December low, re-tested the recent low in mid-July, and started up again, overcoming a short-term high. It was pulled down one more time by the current market weakness, but has remained above the June low. That means that from June, it has once again started a series of higher highs and lows.

On Friday, it closed just outside of its short-term downtrend line and on its high of the day while the indices pulled back at the close. If you look at the SMH indicators, they've already made a series of higher highs and lows while the price was bottoming out, and they are already in an uptrend with some of them positive.

If that index is ready to resume its uptrend, it's clear that it will help NDX. If both AAPL and SMH are reversing, NDX is not going to sit there like a bump on a log!

SMH Daily Chart
Larger Image

Next, I am going to by-pass the daily SPX chart, and go directly to the hourly. It will better demonstrate the potential trend reversing action that happened on Friday.

Let's start by drawing the most important trend line of the correction: connecting the lows of 9/26 and that of last Friday. Assuming that we do not make a new low next week (which would invalidate that line), let's now draw a (grey) parallel to that trend line from the minor low of 9/20. That gives us a trend line which has 7 precise contact points, including Friday's intraday high. With that many support and resistance points, it's fair to say that this is a very important line and that, if it is broken on the upside, it should mark the beginning of a short-term reversal.

Now let's look at the indicators to see it we can figure the odds of that trend line being penetrated to the upside. Both are showing positive divergence, are trending up, and the two top indicators have already gone positive. In other words, according to the indicators, we already have a short-term buy signal.

Now, let's complete the chart. We'll draw another (grey) parallel line starting from the top of the move at 1474, and another at each consecutive top, except that the last one will be black because it's an external parallel to the bottom (black) line. These channel lines currently represent the main thrust of the correction. And, besides giving us the break-out point for the start of a short-term uptrend, they also give us potential projection points for the rally. Each line represents a potential resistance point. If we make it all the way to the top trend line, we are most likely in an extended, but mild correction. If we stop at any of the others and turn down again, we may be in the process of accelerating the downtrend.

There is one more channel to draw and that's the red channel which connects three lows, with a parallel drawn at the last top. That represents the current short-term channel. Whether prices stay within that channel or move out of it will define the nature of the correction.

Note that the 200-hr MA runs concurrent with the grey line from the top. That makes that level a good initial target for the rally when it starts. Besides that, it's also the high of the brief rally in the downtrend. 1434/1436 is also a P&F phase projection and could be a tough level to get above, near-term.

S&P500 Daily Chart
Larger Image


Cycles

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.

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

In addition, there is evidence that we may have reached a short-term cyclical low.


Breadth

The NYSE Summation Index and McClellan oscillator (courtesy of StockCharts.com) are shown next. The NYSI has now dropped below the 200-DMA, with its RSI already in the oversold zone. The MACD has grown a little more negative, but still maintains a fairly shallow negative level.

We can see why, in spite of the correction, there has not been much downside acceleration in the NYSI. The McClellan oscillator (from which the Summation index is derived) continues to hold at the level of the green line that I have drawn on the chart. This represents the level reached by the McClellan oscillator during moderate corrections. Since the NYMO has already turned up, it's another reason to believe that it's going to hold that level and that we are due for a market reversal. A more severe correction would create much more negative figures in both of these indexes.

NYSE Summation Index

NYSE McClellan oscillator


Sentiment Indicators

I continue to show the SentimenTrader (courtesy of same) for the past five weeks in order to give a sense of the trend. With both short and long term readings neutral, we can deduce that we have a fairly neutral market as well.

Sentiment

VIX

Hallelujah! VIX has finally reversed its trend by making a new short-term high. Well... perhaps we should not get too excited, yet. It looks as if the move has already sapped all its strength. It met with resistance at the 200 DMA and at the top of the green channel line, and could not even get up to the longer-term trend line. Not only that, but while the indices were making lower lows, the VIX was making lower highs instead of higher ones!

I think we'd better wait until the index has closed above its long-term trend line before we start expecting much more weakness in the market.

VIX Daily Chart
Larger Image

XLF (Financial SPDR)

I have mentioned that financials are relatively stronger than the SPX. This can be seen on the following daily chart of the XLF whose action is compared to the SPY (magenta line). The SPY is following the path of the SPX and making lower highs and lower lows, while XLF is holding up much better.

Analyzing the chart of the XLF itself, it neary made a double top on 10/18, subsequently breaking a short-term trend line, but remaining above its June 04 trend line as well as above its September 26 low. Because the financial index is stronger than the SPX, one should be careful about expecting too much overall market weakness. Financials tend to lead the market on the downside, at least at major tops, and sometimes by a considerable time period.

XLFDaily Chart
Larger Image


BONDS

TLT continues to correct within the blue channel and is not showing any urgency to break out of it.

A rally in the equity market may cause another pull-back to test the recent low. Since that low was only a phase count target on the P&F chart, breaking it would cause a potential drop to 1413-1414. If it happens, it would still leave TLT in an uptrend. Let's see what the next couple of weeks bring.

TLT Daily Chart
Larger Image


GLD (ETF for gold)

Gold has closed in on its initial support level which is the bottom channel line. It has essentially met its downside P&F projection of 164/165 and may be in a position to bounce off the trend line. The dynamics of that bounce will determine whether it will propel GLD beyond its resistance level, or if it is merely preparation for a drop to the next support level.

Gold ETF Daily Chart
Larger Image


Summary

If the cycles have their say, the indices have started what could be an intermediate trend correction into January, but the action of the last few days warn that a counter-trend rally is about to start, perhaps as early as Monday.

AAPL has had a significant influence on the market, especially the NDX. On Friday, AAPL found support on a long-term trend line and gave some indication that its correction may be over for the time being. If the stock recovers from here, it should lead the NDX on the upside, just as it led it on the downside during its correction.

 


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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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