Parameters for whether & when the S&P 500, dollar & gold reverse trend: Market Turning Points update by Andre Gratian

Here's what my readers want to know - is the stock market topping out? And if so, only for the near term or might it be significant? What about the stock market's position with respect to the very long-term cycles? We want to get a full read on the market including its technical strength, cycles and projections. Here's a great technical analysis report to help you get that - Andre Gratian's Market Turning Points update on the stock market for the S&P 500 index ($SPX), and we're lucky that he's adding another update of the gold price. This is one reason why I've been saying, don't assume the stock market goes up - don't assume it's going down - Andre shows you the numbers, indicators and trendlines that will either help or hurt the bulls or the bears. Similarly, if you are trading the gold price - read what Andre has to say about it, in his report below.

I wasn't able to post Andre's weekend update until this evening, but am delighted to share it now because his stock market views are invaluable and we really appreciate being able to share his weekly updates here. Of course his subscribers received it Sunday, as well as his intraday updates that he emails out (including his updates the past two days!). You can get more info at Andre's website http://www.marketurningpoints.com/ ....

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October 3, 2010

Turning Points

Week-end Report

By Andre Gratian

We'll start by analyzing the Hourly Chart, because it is the one that shows best the current market position and what needs to happen to change the trend.

The SPX is in a short-term uptrend which started at the 1041 level. The uptrend is defined by the brown channel in which prices are currently trading. Until they come out of that channel, the index remains in an uptrend.

The uptrend is also defined by the fact that the index is progressing through a series of higher highs and higher lows. The lows and the final high are marked by horizontal red lines. Should there be a close below 1140 on an hourly basis, it would end this progression and jeopardize the uptrend. This would also cause the index to trade outside the lower trend line of a triangle which outlines the activity of the last two days. However, unless there was a subsequent move below 1122, chances are that SPX is simply broadening its sideways pattern.

When the SPX made its low at 1041, it began to form a base which, by the time it started its uptrend, measured 99 points across. This count added to the break-out point of 1049, gave us a target of 1148 which was reached a week ago and, since then, the index has not been able to move higher. There was a brief attempt at doing so but, as soon as the price reached 1157, it came right back down.

These are the reasons why: after prices backed-off from the 1048 target, they stabilized and created a small P&F base which only counted to 1056. At that level, they also encountered the resistance created by the (black-dashed) top line of the channel drawn across the 1011 and 1041 lows, and the 1119 high.

There is a potential extension of 20 points which could be added to the base and cause prices to rise to 1168, but this is a "weak" count, because it was formed before the SPX reached 1041. For this reason, the reliability of this extra count is in question. In a very strong market, the rally would probably extend to that level but, under other circumstances, the strong count 1148 should determine the top. Since an attempt was made to move higher and failed at 1157, the odds have increased that 1168 will not be reached in this rally.

I also want to bring your attention to another feature of this chart. On the left, you see a number of horizontal blue lines of different length. These represent "volume at price". According to this index, most of the volume traded at 1144, and it diminishes as prices move higher. After 1146, it drops down to nearly nothing. What this tells us is that traders were not chasing stocks after the 1148 was reached, and when prices rose to 1156, there were practically no takers. This is another reason why there was an immediate retracement.

I don't think that the Daily Chart (above) will enlighten us any more about the immediate course of the market, but we can give it a cursory look to see how everything we just discussed fits into the longer-term perspective.

The SPX is currently trading about mid-point of the bull market channel from March 2009 and shows no immediate sign of reversing that trend. When it pulls back into the cycle lows, it should not get even close to the bottom trend line.

The index is also at the top of the black channel mentioned above, and if the bull market is to continue into 2011 after the cycles have made their lows, it will have to break through the top of that channel. If it fails to do so, this will be the first indication that the "bull market" came to an end at 1220. Considering the cyclic configuration that lies ahead, this bull market is nothing more than a secondary reaction in the secular bear market which started in October 2007.

Even if the index were to make it above 1220, it is not likely to extend beyond mid-2011, at best. This is about all the time that can be allotted to the up-phases of the 6 and 7-yr cycles which caused the March 2009 low, and to those of the 2 and 4-yr cycles which bottomed in July and September 2010. Beyond that time frame, a decline should begin with no substantial relief until about 2014, when the 40-yr and 120-yr cycles are scheduled to make their lows.

Gold

GLD has now reached its Point & Figure target of 128-130. Below, on the left, a Daily Chart shows the P&F targets from the 108 base, and the 116 re-accumulation level. On the right, an Hourly Chart shows the possibility of an exhaustion gap. If the ETF were to open below 128 and continue below 126, it would have formed an island reversal, and this would be a strong indication of a top since the hourly indicators are showing significant negative divergence.

Gold has been moving up in concert with the SPX. Both have been moving in opposite direction to the dollar. If the dollar were to stop going down and start a counter-trend move, both GLD and SPX would sell off! Is there any indication that the dollar is near a reversal?

The (blue) momentum indicator of the dollar ETF Daily Chart (below, left), and theWeekly one (not shown) both reflect anextreme oversold condition, while theHourly Chart (right) is now sporting positive divergence for the first time in several weeks. That alone, tells me that a rally in the dollar is imminent.

Furthermore, if I interpret the P&F chart correctly, the targets provided by the distribution at the May top and the August re-distribution level have been met!

Note that the UUP hourly chart is the mirror image of the GLD hourly chart, showing the same potential exhaustion gap as a result of last Friday's price action and the same divergence. Should there be an opening gap which creates an island reversal, it would be a sign that the selling has been exhausted -- at least for the time being.

Here is a summary of the market position:

· The SPX has met its base target of 1148 and has not shown any serious inclination to extend the rally. An attempt at doing so resulted in immediate failure. An hourly close below 1140 with negative A/D of 1300 or more would most likely signal a reversal. A daily close below 1131 with negative A/D of 1500 or more should confirm that reversal.

· GLD, the gold ETF, which moves in tandem with the SPX has reached its 128-130 P&F projection and, in conjunction with negative divergence in its hourly momentum indicators, has created what appears to be an exhaustion gap.

· UUP, the dollar ETF, which moves in opposite direction to the SPX and to gold, has met its 22.50-23.00 P&F target and, in conjunction with positive divergence in its hourly momentum indicators, has created what appears to be an exhaustion gap.

The SPX needs to meet the conditions cited above -- and follow through -- for a trend reversal which would take it out of its brown short-term up-channel.

Andre