Monday, July 12, 2010

Technical analysis of the S&P 500 rally shows it may crest soon - what to expect: Turning Points update by Andre Gratian

Andre Gratian has opinions about the markets that you'll want to know! Technical analysis can give great insight into the health of a market and the probabilities for its next moves. Here's Andre Gratian's weekend report with his technical analysis of the S&P 500 (SPX), and also including an update of his analysis of gold. He takes an objective approach using classic technical analysis together with cycles, Fibonacci work and some thoughts about wave counts, in his Turning Points reports. Here's what Andre is sharing in this week's report:

July 11, 2010
Turning Points - Weekend Report
By Andre Gratian

It’s more than probable that the SPX rally from 1010.91 is coming to an end. One question is whether or not it has already seen its high, or whether it can go and fill the potential base count of the low 1080s. The deceleration process which is evident in the hourly chart combined with super-overbought indicators is not a good recipe for moving much higher. A more important question is: “What happens after this rally tops out?” Let’s answer this one by looking at some charts.

We’ll start with the Daily Chart. I was looking for the bottoming of the 2-yr cycle on about 7/12. The indicators all gave a buy signal on 7/06, at the same time as the index broke its downtrend line from the 1131 high. But there was also a 77-78wk cycle making its low in this time frame. If it comes in right on time, it would be next week or the week after. So the next question is: “Did it make its low a week or two early along with the 2-yr cycle, or is it still ahead of us?”

Whether it has or not will determine how much of a pull-back we get after the current rally tops out. If it is mild, chances are that the cycle has already made its low. If not, then we know that the 77-78 week cycle is now bottoming.

There is also a 16-week cycle bottoming at the end of next week, and a 26-td cycle bottoming the week after. Either one of these could combine with the larger cycle to mark its low, but I think the odds favor next week. Since the 12-wk cycle is likely to have reversed last week -- as demonstrated by the buy signal in the daily indicators -- it will hinder the other large cycle from expressing itself fully, and I would not expect an overwhelming weak correction which should end well above 1011. After that, the rally should resume.

It makes sense for the rally to top in this area. There are at least three good reasons for it to have hit a strong level of resistance. First, the declining green 34-dma. Next, an extension of the blue trend line -- which is the bottom of the (blue) channel line which marked the consolidation area at 1040. And thirdly, it has come up against the down trending red dotted line, which is the resistance line that stopped the previous rally at 1131. All these factors combined should form a strong resistance level which should stop a rally as extended as the current one is.

This is an interim rally in an intermediate downtrend. Therefore it would not be expected to overtake the major (thin black) trend line right away and move out of the (red) intermediate channel. But after some consolidation to relieve the overbought condition and two major cycles at its back, it would not be surprising if it had little difficulty moving out of the red channel and going on to challenge the former high of 1131. Contrary to the opinion expressed by some analysts, there is little evidence that we are in a weak market. Look how the SPX has been resisting its downtrend! The overall angle of decline is shallow and it looks like it is making a rounding bottom. It resisted going below the 1040 level and, when it did, the break below it was brief. This was followed by a strong rebound which has taken the index close to 1080. How could this be perceived as weakness?

Anyway, all this should be determined decisively over the next two weeks. Forecasts should always be confirmed by market action.

We’ll now turn to the Hourly Chart so that we can examine more closely the deceleration pattern which is in process. But first, let me mention one more thing about the daily indicators. There is no sign of weakness there. They have given a strong buy signal and, although they are not in a position to give a strong sell, a pull-back would be perfectly normal. After the rally resumes, we can draw trend lines, channels, etc… and determine when the daily trend comes to an end. Not now!

The red channel of the intermediate downtrend is better seen on the daily chart. The lower channel line is drawn across the two lows of 5/6 and 5/25. The top line is a parallel which starts at the 1220 top. It is important to note that the top line corresponds exactly with a resistance line similar to the dotted line which stopped the rally which ended at 1131 and which is instrumental in creating resistance for the current rally.

If, after a correction, the rally resumes and this line is overcome, and subsequently the SPX continues beyond 1131, the intermediate decline will be nullified and another potential intermediate uptrend will start. That also remains to be seen.

The hourly chart shows that a triple bottom base was formed, and out of that base a short-term trend with strong upside momentum started. The strength of the upside momentum is demonstrated by the MACD oscillator which went from a deeply oversold position to an overbought one which reached that of the 1131 peak without consolidation. The reversal of the 2-yr cycle is most likely the cause of that strong momentum. When there is so much strength in a move, it takes a while to reverse the trend, and this is what is happening here. This is reflected in the middle indicator which has been overbought for 4 days but has been unable to reverse.
As it stands, there is still no sell signal, but a drop below 1069 will turn the indicators down and give one.

The very pronounced negative divergence of the lower (A/D) oscillator is telling us that this is probably imminent. After a reversal, prices could find support on the green channel line, or decisively move through it, depending on the severity of the decline.

I have already pointed out several resistance points on the daily chart. In addition, note that the hourly price is up against its (red) 200-dma and that this will create additional resistance. I pointed out earlier that the base count had a potential to move prices to the low 1080s, so Monday morning could see a little additional strength in the index before it rolls over. On the other hand it could just as well give us an immediate reversal. We will get a hint of what it intends to do Sunday p.m. from the Globex futures.


GLD (the gold ETF) gave a sell signal when it double-topped at 123.50 and broke out of its green channel. It is still in a short-term downtrend and has an immediate projection of about $GOLD at 1115. This corresponds with a former low and important trend line. If it should break below that trend line, it will probably be starting an intermediate correction with an initial target of about GLD 109-106.

If it is capable of holding at GLD 115, it has a chance of rising to its upper P&F target of GLD 128. The alternative is that it cannot rise above its former high, but creates a larger distribution area before starting an intermediate decline.


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