Monday, June 14, 2010

The importance of the SPX testing 1100, plus technical indicators and cycles: Andre Gratian's weekend report

Here is Andre Gratian's weekend report with technical analysis of the financial markets focused particularly on the S&P 500 index. We see today it already reached his number around 1100 and so readers will want to read his report to understand what this may mean!

Thanks again to Andre for allowing us to share his insights into the markets:

June 13, 2010
Week-end Report
Turning Points

By Andre Gratian

The main function of the weekly chart is to provide an intermediate to long-term perspective of the market trend, and it does an excellent job of that. It also enables you to anticipate where the longer-term cycles will make their low. Let’s start by analyzing the SPX Weekly Chart.

The medium-term bear market came to an end in early March 2009. The index is now in a medium-term bull market which should continue into 2011. It is unlikely that this bull will surpass the October 2007 high, because the primary trend is down and is not expected to bottom until 2014 in conjunction with the 120-year cycle low.
The intermediate trend from the March 2009 low was defined by the blue channel. It came to an end when the lower channel line was penetrated at the beginning of May. Note how the index could not rally past the resistance provided by the mid-channel line.

The bull market trend is defined by the green channel. The current correction is finding temporary support on its mid-channel trend line, but it has already been violated; it is a good bet that it will be broken by the time 2-yr cycle makes its low. Going below 1040 would confirm the intermediate nature of the correction.

This trend will probably last until the fall, with a low expected in the nest of cycles shown on the chart.

As for the near-term, at some point the current correction will end, and the index will reverse and start a rally to test the 1220 high. The indicators do not yet appear ready to support that reversal.

The weekly chart gives us a good feel for the longer-term trend, but is not sensitive enough to pin-point short-term reversals. For this, we need to analyze the Daily Chart.

Blue and green channels are also drawn on this chart. In addition, there is a small black channel which represents the last leg of the intermediate trend. It was broken to the downside about a week before the blue trend line was penetrated. Since then, the correction has been confined to the red down-trending channel.

On Friday, prices inched closer to the top line of that channel and closed about 10 points below. A penetration of that trend line followed by a move above the former near-term highs would tell us that the correction is over and that a buy signal would have to be considered. Not so easy to do! To begin with, along with the trend line which is at about 1101, and the former tops at 1103, the index would also have to overcome the 200-DMA which is at 1099 and which has repelled price twice recently. That is a formidable resistance area.

In addition, the cycles which are likely to determine the end of the correction are directly ahead of us. The gray vertical lines represent the dates on which the two main cycles are likely to bottom. Since it is the more important of the two, the 2-yr cycle will probably see the lowest prices. It will also be the more difficult to pin-point, time-wise. Historically (going back to 1970), this cycle has predominantly made its low in early July. This is where I have placed the vertical line, but it must be given some leeway, and the final determination will be made with the help of the indicators and trend lines.

The breadth indicator, at the bottom, is always the early bird. After reaching a deeply oversold condition, it has already shown some positive divergence at the last two short-term market lows, telling us that a rally is right around the corner. It has also already established an uptrend which will probably not be reversed as
the market completes its correction. Any pull-back is likely to be in the vicinity of its lower trend line. It, too, has reached an area of resistance which will probably take time to overcome.

To achieve an even more detailed analysis, let’s now move to the Hourly Chart.

This chart gives us the opportunity to see more clearly the near-term trend (which has developed since 6/8) and what we can expect from it. The market is made up of small patterns which make up larger patterns, etc… Therefore, a thorough scrutiny of the near-term pattern is important if we want to know how the larger pattern which started on 5/25 -- and is basically a sideways consolidation -- is going to end.
The near-term trend is contained within the green channel lines, and prices are currently trading at the top of the channel. At Friday’s close the index penetrated the main trend line from the 1220 top. This would be important if it had also done so on its daily chart, but it has not. Furthermore, I have already mentioned
the severe resistance which lies directly overhead and which is likely to stop the advance if it continues; especially considering that the momentum oscillator is overbought and has started to show negative divergence, and that the A/D oscillator has already given a preliminary sell signal. And let’s not forget the bottoming cycles directly ahead.

When this advance started, I gave it an objective of 1086 which was subsequently revised to 1089. After reaching 1088, the index went into a small consolidation or re-accumulation phase from which it broke out to the upside at the close. On the P&F chart, that small phase has a potential objective of 1094. Since the index closed at 1091.63, and all the hourly indicators show that we are very near a top, it is more than likely that the SPX won’t even make it to the 1100 resistance level before reversing.

Since nothing is ever certain in forecasting market moves, we need to see what happens on Monday morning. A strong opening could alter the whole technical picture and tell us that the near-term trend is continuing, especially if the index rises above 1104 on very positive breadth.

The other thing to watch for is a pull-back from the 1091-94 level which does not bring much selling, but only forms another consolidation. This also could mean that the near-term trend is trying to extend upward.

Barring the development of these two conditions, a reversal from this general area would be a sell signal which would be fully confirmed when prices penetrate the lower (green) channel line -- currently at about 1068. There is an open gap between 1056 and 1059 which makes an inviting target for prices when they reverse.

Besides the two major cycles, there is also a 26-d cycle expected to bottom on Tuesday which will be another source of pressure on prices.
If we do get a downward reversal from this level, it is likely that the decline will not end until the 2-yr cycle has made its low. When we have a better sense of how the decline will progress, we can establish a projection, and this will be helpful in pin-pointing the 2-yr cycle bottom.


No comments:

Post a Comment