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Market Turning Points

By: Andre Gratian | Sunday, December 16, 2012

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 in the form of A-B-C. It is likely that wave B completed at 1439.

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

"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."

Summary: "1430 and 1443 have been mentioned as potential targets if 1424 was exceeded."

Last Wednesday, SPX rallied to 1438.59 then started to decline. The decline lasted into Friday, by which time the index had lost 27 points.

The Dow Industrials -- which was the first to extend the rally-- also made a new high at 13329 before reversing, but the NDX could only re-test its high of 12/03 and, on Friday, briefly broke below its 12/06 low, but closed above at the end of the day.

My view of the market position is that, since 1474, the SPX has been in an intermediate corrective wave with 1343 being the half-way point, or the completion of the "A" wave. There is now a good chance that Wednesday's high represents the top of "B", and that "C" is now underway. If that's the case, and "C" is of the same length as "A", the total correction should be complete by mid-January. In fact, this is about the time that the 66-wk cycle is expected to make its low.

The only thing that could change that scenario is if wave "B" is still not complete. In spite of the 27-point drop, SPX still has not given a confirmed sell signal. There is a good chance that NDX has, but may not be ready to continue its decline right away, and DJIA, being the strongest of the three indices, is even less likely to be susceptible to much more immediate weakness.

Further selling next week could trigger a confirmed sell signal, but if none develops, a test of the high should occur.

Let's look at the charts.


Chart Analysis

Since I mentioned that the Dow was the strongest of the three indices, let's start by looking at its daily chart, below which I have positioned the McClellan oscillator.

Dow Jones Industrial Daily Chart
Larger Image

Since the mid-November low, the Dow has been in a steep uptrend but, on Friday, slightly violated its trend line. However, if we frame the up-move with channel lines, we see that it is still trading in the upper half of that channel. Until prices show more weakness, we cannot say conclusively that the uptrend is over.

This analysis is reinforced by the various indicators. On the price chart itself, the index is still well above its 200 DMA as well as the 21 DMA. At the bottom of the chart, the SRSI and the CCI have both turned down, but are still positive.

The NYMO is a little more negative, having made a H&S pattern, but it is essentially still neutral. All told, we will need to see more weakness before we conclude that the DJIA has given a confirmed sell signal which would represent the beginning of the "C" wave.

Dow Jones Industrial Daily Chart
Larger Image

The Russell 2000 often takes the role of a leading indicator, and it has not given a confirmed sell signal either. Its pattern is very similar to that of the Dow but a trifle weaker. It, too, is sitting above some good support which helped it remain above the previous day's low on Friday.

The indicators are also similar. As in the DOW, the Russell price index remains well above its 200 DMA and 21 DMA. And at the bottom of the chart, although they have turned down, the indicators also remain positive.

Both charts suggest that the market may not be quite ready to reverse its positive short-term trend; at least not without having a test of the recent highs.

IWM Daily Chart
Larger Image

When we look at the 60m chart of the SPX we notice the same patterns of support, deceleration and divergence that exist in the daily charts above, but they are more visible.

S&P500 Hourly Chart Chart
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On Friday, the index came to rest on the mid-channel line and, even if it were to break it, it would immediately find good support on the blue horizontal line which represents a level where declines have been arrested before. Note also that it is still trading above its 200-hr MA.

The deceleration is evident in the price, but it is even more so in the indicators as positive divergence. The hourly MACD of the A/D also shows positive divergence and its histogram remained positive until the end of Friday's session.

On the Point & Figure chart, the top formation has made a distribution pattern which has a good phase projection to about 1410. Considering the indicator patterns of the hourly chart, that level may stop the decline for a while, and perhaps produce some sort of rebound.


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."

Even if we do not yet have a confirmed reversal, the downward pressure of the 66-wk cycle has probably started and should continue (with some minor interruptions) into its early 2013 low.


Breadth

The Summation Index (courtesy of StockCharts.com) has continued to rise, touching its 200 DMA on Friday. The RSI had a slight downtick, but the MACD is still rising and its lines have not made a bearish cross, keeping the histogram positive. Were these indicators already in an established downtrend, we could expect the market decline to continue, but since no real weakness is yet showing, we cannot say with certainty that the market has reversed.

NYSE Summation Index Chart


Sentiment Indicators

The short-term signal of the SentimenTrader (courtesy of same) has come dead center and could not be more neutral. This could mean that the decline has a little more to go over the near-term. The longer term index is just beginning to enter the pessimistic zone. It will undoubtedly be much lower by the time that the 66-wk cycle has made its low, putting an end to the intermediate correction.

Sentiment Indicators

VIX

This week we look at the VIX by itself with a 4-hr chart, and this gives us just the perspective we need. Last week, we saw that VIX was predicting a near-term reaction in SPX - and it was right. This week it is in sync with SPX, rising while the latter is falling. But it is not yet predicting a severe downtrend. To do that, it will have to rise above 17.50 -- which it will probably do eventually-- but for now, it is likely that 17.50 will cause a minor pull-back in the index. This is supported by the P&F chart which suggest similar action, intimating that the market will rebound before going much lower.

VIX 4-Hour Chart Chart
Larger Image

XLF (Financial SPDR)

"This is one leading index which says that SPX will probably go higher before finding a top."

As I have often mentioned XLF, like VIX, is of great value as a leading indicator. On this hourly chart, we can see that XLF has a chart pattern in the form of a wedge, similar to that of the Dow but, unlike the Dow, on Friday the decline stopped on its uptrend line while the Dow went slightly through. That makes it stronger than the Dow, and much stronger than either the SPX or the NDX, and it is probably telling us to expect some sort of rebound.

Its indicators are saying the same thing with an oversold SRSI and some positive divergence in the CCI.

XLF Hourly Chart
Larger Image


BONDS

TLT matched the decline in the indices with a decline of its own, which is not that unusual but is a sign of weakness and, if the indices are ready to rebound, it's likely that it will decline some more.

It appears to be finding support on the top (red) channel line (for the third time now). If it should hold that line as the indices rally, the technical damage will not be too severe and it will still be able to extend its interrupted uptrend a little higher. However, and although this may be a little premature, the best that can be expected is that it will have a re-test of its 132 top. The odds of its making a new high to 137 are diminishing rapidly.

TLT 2-Hour Chart
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GLD (ETF for gold)

GLD found support on its 200 DMA the first time that it touched it. I may not be so lucky over the next few days. That will depend, to some extent, on the strength of the rebound experienced by the indices.

Gold 4-Hour Chart
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Beyond that, it will probably not be too long before GLD succumbs to the downward pull of its 25-wk cycle which is due to make its low in late December. By then, it could drop to the next support level shown on the chart. This would coincide with the standing P&F projection down to 157-159.


UUP (dollar ETF)

Strength in the Euro is having an adverse effect on the dollar. After failing to continue its uptrend beyond the 200 DMA, UUP has pulled back and is challenging its recent support once again. There is no clear P&F projection for the low but, considering that the trend appears to be accelerating on the downside, we will need to see some better price action before the index is ready to resume its uptrend. The most logical point for the downtrend to stop would be at the bottom of the grey channel. If it does, it would complete an a-b-c correction, preparing UUP for a resumption of its uptrend.

UUP Daily Chart
Larger Image


USO (United States Oil Fund)

There is little change in USO and it seems to be marking time. It appears to be roughly on the same wave length as GLD, so we may have to wait until the end of December before USO can find a low.

USO Daily Chart
Larger Image


Summary

There is a good possibility that the B wave of an intermediate A-B-C pattern is now in place and that SPX has started the C wave.

Although there are signs of deceleration in the decline from 1439, there could be a little more selling taking place before we have a re-test of the high in the stronger indices, i.e. DJIA and RUT.

 


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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.

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