Market Turning Points

By: Andre Gratian | Sun, Dec 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 has made a top at 1474. A mid-correction rally 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

The 1424 level of the SPX did what was expected of it: It stopped the counter-trend rally which started at 1343 and caused a reversal of 26 points. Since finding support at 1398, the index has shown resistance to additional selling, and closed the week at 1418, its action suggesting that It may be willing to go beyond the 1424 level before putting an end to the corrective uptrend.

An indication that it may be willing to move higher is the fact that the Dow -- which had halted its rise with a 50% retracement of its decline from the 10/05 high -- closed the week at a new rally high of 13155, ostensibly on its way to the .618 level of 13205 and perhaps even higher.

On the other hand, NDX -- which has been affected by AAPL's weakness - is lagging behind, in spite of the strength in the semiconductors.

Until proven otherwise, the market is still deemed to be in a corrective uptrend, the "B" wave of an intermediate A-B-C pattern. Whenever this rally is over - and after whatever level to which it takes the indices - there should be a continuation of the intermediate correction into the early part of 2013. As of now, the daily indicators are still bullish but, for the first time in the entire rally, they are susceptible to developing negative divergence, which would be an early warning that the rally is about to end. As usual, it will probably show in the breadth indicators first. In fact, for the past 5 days, the A/Ds have given an anemic performance, mostly remaining neutral on an hourly closing basis. If this continues while the market attempts to extend its rally, it will become a red flag.

The general market action shows that it expects an early and favorable resolution of the "fiscal cliff" negotiations. This leaves some room for disappointment if it falls short of expectations, but it would not preclude a final surge when an agreement is reached.


Chart Analysis

Let's look at the daily SPX chart, below which I have added the McClellan oscillator. The blue trend line is an intermediate trend line connecting the October 2011 low with the June low. After breaking through it on the way down, the index rallied and tried twice to get back above it, each time falling back below. It is obvious that it is running into resistance at the broken trend line -- something which is quite common. Now, it is trying one more time. Will it succeed? And by how much? In the process, it has formed a bearish wedge pattern which would allow it to rise once again above the trend line, but if it fails to go past the top wedge line and turns down again, it will probably have completed its counter-trend rally.

S&P500 Daily Chart
Larger Image

The RSI stochastic became overbought on the first rally and still is. It can remain overbought for as long as the uptrend remains in effect, but when it falls below the red line, it will most likely give a sell signal.

The MACD histogram is still very bullish, only showing some mild deceleration. It will have to turn negative before signaling a sell.

The NYMO double-topped just below 60 and pulled back. Unless the next price and breath rally is very strong, it should develop some negative divergence. Its RSI, instead of becoming overbought (which would have been a sign of strength) stopped rising at about 65 and started to pull back, going flat just above 50. Dropping below 50 would be a sign of weakness and a possible sell signal.

As it stands, the index has a decision to make. In order to show that it can move higher, it has to re-gain some upside momentum, and soon. If it has not done so by next week, the odds are good that it will be ready to continue its intermediate correction.

On the hourly chart, we can see better how the blue intermediate trend line has acted as resistance for the past two weeks, which could be the reason why the MACD and especially the A/D (below the chart) are both making such a poor showing. In addition, the hourly stochastic RSI is also overbought.

The wedge pattern gives the SPX another potential move of 15 or twenty points before it comes out on top and modifies the weak pattern for a more bullish one which would have to be interpreted as a resumption of the rally; unless it's a blow-off move which is quickly over.

S&P500 Hourly Chart
Larger Image


Cycles

We should be getting close to the point where the cycles bottoming in early 2013 begin to reverse the trend. But cycles can be overridden temporarily by fundamental developments which could be the situation today.

A 3-wk cycle (which may have bottomed over the week-end) could be the reason why the A/D has made such a poor showing over the past week. If so, we could see a resurgence in A/D (and price) strength after Monday.


Breadth

The Summation index (courtesy of StockCharts.com) has rallied but may be starting to curve over before it gets to its moving averages. This is even more apparent in the RSI. That's a sign of deceleration which is no wonder considering the static performance of A/D in the past week.

NYSE Summation Index Chart


Sentiment Indicators

Both short-term and long-term signals of the SentimenTrader (courtesy of same) are staying neutral.

Sentiment Chart

VIX

The 60m charts below (courtesy of Q charts) show VIX compared to SPX. The black asterisk below Friday's close indicates that the two indices are still moving in opposite direction. Normally, this would suggest that the equity index should continue its uptrend. We would need to see relative strength in the VIX before expecting a high in SPX.

The next indicator tells us that the SPX is probably not ready to reverse, just yet.

VIX Chart
Larger Image

XLF (Financial SPDR)

This is one leading index which says that SPX will probably go higher before finding a top. It exceeded its Dec. 03 top 3 days ago, while SPX still has not. That would imply that SPX will follow suit in the coming week. There are similar pockets of strength in individual market components which makes it difficult to predict an immediate end to the rally.

XLF Hourly Chart
Larger Image


BONDS

TLT does not seem to be ready to continue its uptrend. It has pulled back to the low of a 2-week consolidation pattern which coincides with the 200-hr MA. If it cannot hold there over the next few days, it will risk breaking below the bottom green channel line, suggesting that the index has more work to do before attempting to move higher. Worst case scenario would be that it is resuming its corrective trend from the 132 top.

TLT Hourly Chart
Larger Image


GLD (ETF for gold)

GLD may be getting ready to resume its downtrend. After dropping to its 200-DMA, it bounced a few points during which it back-tested the broken bottom channel line. After pulling back, it made another effort at getting back inside the channel, but failed and quickly dropped back to the level where it previously found support.

It may hold above its moving average a little longer, but with the 25-week cycle pulling it down into the end of December, chances are that it is ready to break its next level of support and perhaps make a measured move equivalent to its first declining phase from the 174 high. If it is a measured move, it should decline to about 157 where it should find some strong support and, at the same time, close a runaway gap that was formed at the beginning of the last uptrend.

Gold Daily Chart
Larger Image


UUP (dollar ETF)

UUP has found support about half-way through its former consolidation pattern and rallied to its 21-DMA. That should stop it for the time being and it could continue to build the previous base at a higher level before trying to overcome its 200-DMA once again. Whenever it starts to move up, this should coincide with a top in the equity indices since it and they tend to move in opposite directions.

Dollar ETF Daily Chart
Larger Image


USO (United States Oil Fund)

USO continues to follow the path of least resistance which is down. Last week's action suggests that the consolidation pattern which it made over the past six weeks is about to give way to an extension of its decline from the 37 top. Its readiness to do so can best been observed in the stochastic RSI which has given a strong sell signal. That means that it may also be ready to drop below the internal parallel (light red line) where it had previously found support.

United States Oil Fund Daily Chart
Larger Image


Summary

As anticipated, 1424 did cause a reversal in the SPX. We are about to find out if it's an important reversal, or if it was just a minor set-back leading to higher prices - and by how much! 1430 and 1443 have been mentioned as potential targets if 1424 was exceeded.

The action of the Dow complex at week's end points to higher prices. The industrials and financials rose to new rally highs on Friday, as did the NYSE Composite Index. This should lead to higher prices next week.

The announcement that an agreement has been reached in the "fiscal cliff" negotiations could cause a final surge in wave "B" of the intermediate 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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