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May 28, 2012
Market Turning Points
Week-end Report
By Andre Gratian
MORE INTERIM RALLY AHEAD?
Precision timing for all time frames
through a multi-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 Twain
Current 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. It is probable, however, that the steep correction of 2007-2009 will have curtailed the full downward pressure potential of the 120-yr cycle.
SPX: Intermediate trend – Correction
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 atajg@cybertrails.com
Market Overview
The market correction which started in early April is not over and, based on cycles, may run into late-July/early-Augustbefore it is. Six days ago, the SPX completed a phase projection and has been consolidating since. From a cyclicalviewpoint, there are two possible scenarios for what lies directly ahead: there is a cycle cluster due in mid-June which could turn out to be a high or a low point for the market. I lean toward its being a high because of the more dominant cyclesthat have recently bottomed, and are about to bottom in the next few days, and which will be setting the trend for thefollowing couple of weeks. (If there is enough upward pressure from the longer-term cycle which has already made its low, it is possible that SPX might even start extending its uptrend past the recent highs right away.)
If this is the case, the current consolidation should end with an extension of the interim rally to about 1340 or higher. It will be followed by the final leg of the correction into the time frame mentioned above, and could reach as low as 1235-1245 before it ends. If this turns out to be the completion of wave 4 from 1075, the index should then start wave 5 and rise to a new high before completing it.
This forecast is a guesstimate based on cycles and structure. It will be refined or modified, if need be, as the market trend evolves.
Chart analysis
On the Daily Chart, we see that SPX is now traveling in the blue channel which defines its current trend. If the target which I have set for the low of the correction is valid, the decline should end outside of the channel and find support on the lower green line, just as it did on the upper one. For now, the 200-DMA is also adding temporary support. It has already been violated, but it does not matter even if it is decisively broken, providing that prices can move back above it as they did during last year’s August to December consolidation.
On the P&F chart, there were two separate phases of distribution which formed at the SPX top. The shortest one, taken across 1411, gave us a count to 1304 which was slightly exceeded as the decline ran its course.
There is another count that could be taken at the 1397 levelthat has stored enough negative energy to take prices down as low as 1235, although the likely bottoming range should besomewhere between 1235 and 1255. I’ll be able to refine thiscount as soon as the current consolidation is over.
The CCI developed some divergence at the recent low, and this argues for an extension of the interim rally before the correction continues. The MACD has no such divergence, only slight deceleration. This suggests that lower prices will be seen before the correction is over.
We can better visualize the status of the consolidation on the Hourly Chart. The initial low was successfully tested a couple of days later, but it only produced a weak bounce which appears to be running out of steam. Two closely related cycles caused the two lows that you see on the chart,and two more that are expected to make their lows by Friday/Monday, could prolong the basing pattern until then. A rally should start soon after the cycles have bottomed, if not before. As soon as the recent high of 1318 has been exceeded, we can estimate how far it will carry.
Cycles
The half-span of the 66-wk cycle made its low on the 18th, followed by the bottoming of a smaller cycle a couple of days later.
A 28-30 day cycle is due either Friday or Monday, along with a Kress cycle of undetermined length.
This group of cycles should initiate a two-week rally into the middle of next month. This will have to be confirmed by market action in the first week of June.
Breadth
Below, I show the NYSE McClellan oscillator (NYMO) as well as the NYSE Summation Index (NYSI), both courtesy of StockCharts.com.
Let’s first look at the lower one (NYSI). The decline which started in February only paused briefly before continuing to make new lows in spite of the deeply oversold state of its RSI. As a result of the current near-term consolidation, the decline in the index has decelerated but not reversed, while the RSI, which is at its most deeply oversold level in three years, is showing the positive divergence which normally precedes a rally in the index as well as in the market. This is another reason to expect a rally as soon as the next two cycles have bottomed (or sooner). However, if history repeats itself, some positive divergence will have to show in the NYSI itself vs. the SPX before we can call an end to the price decline. This cannot take place unless we first have a price rally followedby a decline to a lower level. (This kind of bottom formationoccurred at last year’s September-October lows.)
The NYMO continues to trade predominantly in its negative zone. However, if the cycles perform as expected, in a few days (if not before) it will have the opportunity to becomepositive and remain so for about two weeks.
Sentiment Indicators
The SentimenTrader’s (courtesy of same) long-term index showed its highest reading of extreme pessimism (bullish) when the SPX was nearing its recent low. Since then, as the market began to consolidate, it has dropped slightly but continues to maintain a fairly high rate of pessimism. It may continue to drop as the market rallies, but should rise again as the decline continues, and once again be near the top of its range when the SPX makes is final correction low.
The VIX
The VIX is mimicking the SPX in reverse. At the daily level, there is no bullish indication coming from VIX, but there issome minor one at the hourly. If it persists as the cycles make their lows over the next few days, it will signal the market is about to rally. We should watch for it.
XLF (Financial SPDR)
The daily charts are also in sync, but some positive divergence could (should?) emerge when we near the end of the intermediate correction.
BONDS
TLT has done well in this downtrend. It came very close to making a new high, and could exceed 125 before the correction in equity markets is over. On the P&F chart, there is a potential count to 129.
UUP (Dollar ETF) Daily Chart.
The dollar has benefited from the weakness in the Euro and this has put UUP in a strong short-term uptrend. At the 22.82 close on Friday, It has now filled its initial P&F count of 22.80 and has nearly duplicated its high of mid-January. As a result of the re-accumulation phase that you see on the chart, a count taken at the 22 level gives it a potential target of 23.80, but the indicators are showing some deceleration in the MACD, and the beginning of negative divergence in the CCI. This could invite a pause in the uptrend if the Euro begins to rally which could lead to an early resumption of the rally in equities.
The Euro (24.68) has a potential short-term drop to about 22. This could come later and send UUP to 23.30. There are lower counts for the Euro, but they will probably be met later, perhaps in July. This could be when UUP makes it to 23.80.
GLD (ETF for gold)
In spite of holding at its previous 25-wk cycle low, GLD(below) still looks precarious and quite capable of reaching the 141 target which was derived from its near-term count. This is a confirmation of the same count which was taken atthe 175 level after GLD reversed its long-term trend. When GLD has reached 141, we will re-assess its long-term position.
The current weakness is primarily driven by the next 25-wk cycle which is due to make its low in mid-June.
That seems to go against the scenario proposed for the SPX which intimates that that time frame should be a high for the equity indices. We’ll have to see how this seeming discrepancy resolves itself.
OIL (USO)
USO (above) is just starting to consolidate after reaching a near-term target of 34. That puts it at the bottom of a channel and on top of good support. But this is a conservative target and it may only bring about a brief interruption to the decline. Based on the P&F formation, it is possible for the price to move even lower (30.50?).
The weekly CCI is at an extreme and the daily one is showing some positive divergence -- more indications that USO islikely to consolidate at this level.
USO is relatively weaker than the SPX on a short and on a long-term basis.
Summary
Since meeting its conservative downside target of about 1304, SPX has been consolidating. As a result of the current cyclical configuration, it is likely that this consolidation will expand upward over the next two weeks with a move to 1340 or higher.
This should only be a continuation of the interim rally which started at 1297 and not the beginning of a new uptrend. Another down leg is expected before the correction which started at 1422 is over.
Andre
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