February 20, 2012
Market Turning Points
By Andre Gratian
Precision timing for all time frames through a 3-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 TwainCurrent 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.
SPX: Intermediate trend – Intermediate uptrend still intact, but short-term top imminent.
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 email@example.com.
Based on the re-accumulation phase that formed at the 1300 level, a Point & Figure projection to 1364 was made with a potential extension to 1370. On Friday, the SPX made an intra-day high of 1363.40 in the first hour of trading and immediately pulled-back, trading sideways for the rest of the day. Have we finally reached the rally top, and are we ready for the anticipated short-term correction? Since the hourly indicators have only given an unconfirmed preliminary sell signal, we’ll have to wait until next week to find out.
The near-term market activity will be largely influenced by the news from the Eurozone. On Monday, finance ministers are expected to approve the loan which will enable Greece to meet its March debt obligation. An approval could give US markets a final little boost into the projection area. The first thing that study guides on P&F charting warns about is that projections are only approximations. This is why it is always prudent to wait for a confirmed reversal.
The index structure also suggests that the SPX is reaching a wave completion for the move which started at 1159. Whether the final small wave which started at 1300 is also complete or needs more fine tuning remains to be decided. In any case, trading below 1340 will confirm that a short-term top has been made. Signs of an impending top are abundant, but there is also a hint that just a little more time may be needed. We will see this when we analyze the contrary indicators.
As you can see, I have switched to charts which provides basic, but sufficient information to determine the trend of the market. More descriptive charts are reserved for subscribers. The analysis of these chart will be based on a much broader and more refined perspective including indicators and methodologies not shown here, so nothing will be spared to arrive at the correct forecast.
On this Daily Chart, the trend of the SPX is obvious. It has been in an intermediate uptrend since early October, and in a relentless short-term uptrend since mid-December. As discussed above, prices have (almost) reached the area of a projection made from the re-accumulation phase established at the 1300 level. In addition, just about every indicator under the sun is showing either deceleration or negative divergence, confirming that the supply/demand relationship is shifting in the favor of supply -- something which occurs when buyers become less aggressive, and sellers more so – an indication that a reversal is near. Does that necessarily make it so? No! it could be only a sign that the market is tired and needs to rest, after which, it could resume its trend. So, even when the evidence becomes overwhelming, as it is now, it is best to wait for confirmation that the trend has turned. In this case, trading below 1340 should provide that assurance.
The Hourly Chart provides the opportunity for fine tuning. The lower indicator has reached a level where it is susceptible to a correction. It is true that it can remain overbought for a length of time while the index keeps on progressing upward, but this normally takes place at the beginning of a move, not after the trend is as mature as this one is. Above, the MACD is showing some negative divergence by failing to reach the height of two weeks ago. Both are warning signs.
We should first look for the S/RSI to turn down and when it does, to see what the price does. The green trend line will be the first line of defense, then the red line. If both of these are broken, it will be a good bet that the SPX has met a short-term top and should continue down, exiting its up-channel.
The red horizontal line is placed at about 1340. After prices have broken below, it will be possible to make some projections for the extent of the decline. It should find support in the vicinity of the lower trend line. If it continues below 1285, a revision will have to be made as it will intimate that something more serious than a short-term correction may have started.
The 9-10 trading day cycle is again due in a few days and, if the market does not sell-off on Tuesday, it may mark the top which is expected.
A more important cycle period is expected in the first week of March when several cycles will be nesting. If we do make a top this coming week, that time frame would be a good objective for the end of the short-term decline, after which the market could make an attempt at resuming its bullish trend.
The strong uptrend in the NYSE Summation Index (courtesy of StockCharts.com) appears to have ended, and both the RSI and the MACD have turned down confirming what we see in the price charts indicators: a top is in the making! The RSI, which is very good at defining the high and the low of a trend, is just beginning to roll over and has a long way down to go.
The SentimenTrader (courtesy of same) long-term indicator continues to warn of a potential top in the market, with the short-term on the bearish side as well.
SentimenTrader also reported that last week, traders in the Rydex family of mutual funds reached a near-record level of bullishness.
The VIX has broken outside of its downtrend line and is building a base outside of it. At this time, if the index were to start an up-move, it would only have projection to about 28 on its P&F chart. This would be consistent with a short-term decline in the equity markets.
The MACD has been rising for a couple of weeks (signaling the loss of downside price momentum which normally precedes a reversal which came when the VIX broke its intermediate trend line), but it has made little upward progress since its initial break-out. Now that it has built a small base, it may be poised to do better, perhaps having a spike similar to that of March or June of last year. Whatever it turns out to be, it will probably follow the pattern of the previous ones and quickly return into its base, continuing to build for a larger move.
TLT continues to trade within the confines of its long-term channel, remaining in the upper half and showing little sign of imminent important weakness. Rather, it seems that the index is simply consolidating for a move to a new high or, at least, a test of the high.
After reaching its 125 projection, the index pulled back for an intermediate correction which has now lasted for months (the length of the market rally), but which retraced only about .382 of its previous uptrend with the bulk of the move taking place in its higher range, reflecting the Fed’s on-going low interest policy.
Both of the indicators -- especially the MACD -- acknowledge that the consolidation process is still at work, although it could end abruptly if the equity market starts to correct. The price has been moving down in a well-defined channel which is approaching support from the larger upper channel median, and a little spurt to the upside would quickly take it outside of the down-channel. This is an index which moves rapidly when it is ready.
There will come a time when stocks and bonds will, once again, move in the same direction but, for the time being, they are still going opposite to each other.
UUP (Dollar ETF)
UUP has also been in a shallow intermediate uptrend since it broke out of its base in early September. The base that was built is substantial, with the potential of taking the index up to 25.
The question is when! UUP’s uptrend has progressed through a series of fits and starts, pretty much
guided in the short term by a 25-day cycle (as was pointed out in the last newsletter).
The cycle has just made its low, and it has caused enough of a move in the MACD to put it in an uptrend, but there may be some resistance ahead. Both the U.S. dollar index, the ETF and the indicator have overhead trend lines that they will have to overcome if they are to extend their moves much higher. It’s unlikely that they will, since UUP appears to be in need of additional consolidation before challenging its trend line. I don’t know what correlation this will have with a move in the SPX. The two indices have not always moved exactly in opposite directions.
GLD (ETF for gold)
GLD has been in a correction since it met its intermediate projection in early September and may have reached the low of this correction at 148 in late December. Since then, it has rallied sharply to 171 and is either forming a short-term top to continue its broader correction, or a small re-accumulation pattern in preparation for a move higher.
There is a 9-wk cycle low due in early March which could pull it down to about 161 before it is in a position to move higher.
The longer-term trend line was tested on the dip to 148 and provided good support. The longer-term trend remains intact as long as that line is not broken. If it is allowed to continue, the index could be on its way to reaching its long-term projection of 233.
By trading at 1363.40 last week, SPX essentially reached the 1364-1370 projection area which had been predicted after it completed a re-accumulation pattern at 1300. The target area was reached with a number of indicators signaling that a short-term top may be forming.
It is possible that the high of the move could still be a couple of days away, but the nest of minor cycles presumed to bottom in early March should start to exert downward pressure on prices.
What is less likely is that early March will be a cycle high and not a low. Next week, the market should tell us which to expect.
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The above comments about the financial markets are based purely on what I consider to be sound technical analysis principles. 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.