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August 22, 2010
By Andre Gratian
The picture that the market is currently displaying is pretty clear. With some minor alterations, the scenario is playing out the way that we have been expecting it.
An intermediate decline started at 1220. It was interrupted by an upward correction caused by the 2-year cycle reversal in early July. Because of a number of factors, the top of that correction was expected to come on 8/26, but it appears to have come early, at 1129 on 8/09, and the resumption of the intermediate trend is already under way.
On Friday, a rally probably started which is expected to continue to (about ) 8/26, but it should only be an interim rally in the downtrend. After that date, the index should be free to continue its decline into October with only minor interruptions.
Let’s look at this graphically with the help of the SPX Daily Chart. The top blue channel represents the intermediate trend from March ‘09. When it came to an end, the current intermediate correction from 1220 started and it is best represented by the black channel. It is expected to continue declining until the 4-yr cycle makes its low. The date is estimated to be about 10/20, and the SPX should bottom at about 960.
That’s the best time/price estimate for now, but we’ll verify and refine it as the move progresses.
The intermediate downtrend is expected to develop as the 3-phase A-B-C pattern which is marked on the chart. The A wave was completed in early July at 1011. The B wave has most likely already reached its high at 1129 and we should already have started the C wave. It should end in October at the time and price targets indicated earlier.
The corrective wave which interrupted the intermediate decline from 1220 at mid-point is identified by the lower blue up-channel. The index was not strong enough to rise to the top of that channel, but stayed within the confines of its lower half.
If you look at the indicators, you will see that the lower one exhibited strong positive divergence at the Friday low, signaling a potential reversal. Since this is expected to be only an interim rally in the decline which started at 1129, it should be short-lived and limited in price, and weakness should intensify after the SPX breaks below its blue channel line.
Let’s now move on to the Hourly Chart to better analyze what is expected next week.
The hourly indicators all turned up on Friday, confirming what the daily A/D indicator was prognosticating by showing positive divergence. On this chart, you can see clearly the final down-wave from 1129 which is confined to the red channel. The Friday close on the channel line (after the positive divergence and the reversal of the hourly indicators) makes it likely that we’ve seen the low of the move, and that we should now expect a small corrective up-phase to about 8/26 which should be proportional to the down-phase.
Based on P&F and Fib projections, there are several possibilities for the extent of this phase, and they are: 1086, 1095 and 1103. The first two may carry more weight because they represent a .382 and .50 retracement of the decline from 1129.
Those who expected an immediate protracted decline in GLD after it gave a sell signal must be disappointed, but they could still be rewarded with enough patience. The sell signal is still in effect, and the rally which has occurred over the last 3 weeks is most likely only a test of the high. This is what the indicators are signaling. The MACD has not followed the up-move and, if anything, has accentuated the negative divergence that it displayed at the first top, and the volume on the uptrend has remained very low.
Now that the lower momentum indicator has become overbought and is beginning to turn down, this should tell us that the next move is more likely to be down than up. The sell signal will come when the short uptrend line is broken.
The ETF made a lower low on its first drop. If it cannot rise above 123.50 before turning down, it will make a lower high, which will start a downtrend . Because of the recent change in the P&F pattern, we’ll wait until the top is well-established before making a projection.
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