July 15, 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. 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 – SPX is back in an intermediate uptrend.
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.
The short-term correction of the SPX that had been underway since 7/03 came to an end on Thursday, at 1325.41, a few points lower than anticipated (1330-32), and a couple of days earlier (7/17), but still well within the price and time parameters that had been forecasted. The resumption of the uptrend was punctuated by a strong rally which has already exceeded thirty points, with enough initial momentum to suggest that higher prices are more than likely, but probably not without a near-term correction that would neutralize the short-term overbought condition.
The odds that this rally will take prices to a new intermediate high (from 1267) will increase if the index can rise above the 1362 resistance, ideally this coming week. If it does, the rally should continue into the first week in August, after which we should be prepared for a potentially important period of weakness which could last into October.
The above is an outline of the scenario that I am proposing for the next few weeks. Of course, it will be adjusted as we move along to reflect a possible change in trend. In non-EW lingo, from the 1267 June low, the market is embarking on a 5th uptrend phase. Normally, the completion of a fifth phase is followed by a correction. We should be able to estimate the depth of the correction by the amount of distribution that occurs at the top of the move.
If we have the tools to discern the changes in supply/demand, and whether the battle ground where buyers and sellers fight for supremacy are areas of accumulation or distribution, we should not be surprised by the direction of the trend. Only events that are totally unexpected -- such as the assassination of president Kennedy in 1962 -- can produce an unforeseen change in trend, and then, only temporarily.
Should conditions remain as they are during this rally phase, the SPX would be expected to reach about 1380, and could even stretch to the low 1400s. Being able to overcome resistance around 1362 will determine whether or not these projections can be reached.
Let’s look at some charts.
This is a Daily Chart of the SPX under which I have placed a comparable chart of the NYMO. This gives us an excellent appraisal of the current trend.
There is nothing on this chart that already suggests that the index cannot meet the price projections given above. The last short-term high was achieved with negative divergence developing only in the MACD histogram. That was an indication that a short-term correction was imminent, but it did not reflect on the longer-term trend from 1267. So far, breadth support has been more than adequate. At the last near-term top, the NYMO went to its most overbought level in three years and needed to correct. When it did, it barely went negative before turning up once again on Friday.
During the current rally, we would expect to see divergence appear in both the MACD and the NYMO, and the only condition that has been set for the SPX, is that it must trade decisively above 1362. If it fails to do so, it would be a warning that the above scenario has to be altered.
The Hourly Chart demonstrates the strong momentum displayed by the initial break-out of the downtrend. How we progress from here will tell us if this is just a blip of short-covering, or something more lasting. As long as we do not lose too much of that early momentum in the next near-term correction, we’ll be OK. The main obstacle to fulfilling the scenario depicted above is the red line drawn at the 1362 level. It is the level that stopped the first phase from 1267. Clearly, we need to get past it – preferably by the end of the week -- in order to meet our deadline of early August for an intermediate top.
Should we break the uptrend line (from 1267) before the end of the month, we would be making a significant alteration in the trend pattern of the SPX. Cycles due around August 6 are expected to bring about a top. If they bring a low instead, we would have to change our expectations for what lies ahead.
The cycle which was due on 7/13-7/17 chose to make its low one day early, on the 12th. It caused a short-term climax in the market early in the day, but most of the losses were recouped by the close.
A minor cycle is due Tuesday, and another one around the 20th. Over the short term, the most important cycles will form a cluster in the second week of August. At this time, they are expected to bring about a high, but should they bring a low instead, it would make a big difference in the trend pattern.
I have already shown the NYMO (courtesy of StockCharts.com) above. Here is the NYSI (the Summation index). It represents the intermediate trend of the A/D. As you can see, it is not as bullish as the NYMO. It is beginning to curl over, and its RSI and MACD are both overbought. But, since it is made up of the daily readings of the McClellan oscillator, we will focus our attention on the latter and give this index a little bit of slack. We’ll review it again next week.
Since we are approaching a time of uncertainty for what lies ahead in the market, this week we’ll look at the SentimenTrader (courtesy of same) to see what it’s telling us.
Actually, not much! It is slightly negative for the market in the near term, which matches our expectations for the next couple of days, but the long-term signal is just a little bit on the positive side of neutral. According to this indicator, it does not look as if anything of importance is going to happen over the foreseeable future.
The VIX (volatility index)
The chart pattern made by the VIX (courtesy of Qcharts) continues to be bullish with no expectation of market negativity at this time. This supports the scenario which was traced out in the opening remarks. No storm clouds ahead!
XLF (Financial SPDR)
The third index that I use as a leading indicator gives us the same picture. It is more bullish than the SPX over the near-term and has already overcome the comparable 1362 level but, since it showed some negative divergence to the SPX at its last two intermediate tops (April 2012 and May 2011), we’ll need to keep a close watch on this index in early August. If negative divergence appears once again, it could be an indication that another intermediate decline lies ahead.
The SPX has been in a weak uptrend since early June, but in an uptrend nevertheless. And so has TLT, after briefly consolidating. Actually, TLT started its uptrend in March, which was normal enough -
since this is when the SPX started its correction into the June low. But instead of retracing when the SPX reversed at 1267, it only went sideways for a little while, started to move up again and is now challenging its former high.
If it should make a new high, it could continue rising to 137. However, if the SPX extends its uptrend into the first week in August, it is more than likely that TLT will stop where it is and continue its consolidation before moving higher.
UUP (Dollar ETF) Daily Chart
UUP has been in a shallow intermediate uptrend ever since it found support at the bottom of a long-term downtrend channel that goes back to late 2009. In spite of this steady move upward, it is still confined to that channel and would have to get past 26, at a minimum, to break out of it. That does not seem likely in the near future. The current uptrend is clearly corrective and will most likely be followed by another intermediate downtrend after it has reached its 25+ projection. The base which was built between September and November 2011 is not extensive enough to move it out of its long-term down channel at this time.
Over the near-term, UUP made a new high, but only by a fraction. That may be all it is capable of for now. The Euro Trust (FXE), may be in the process of reversing its intermediate downtrend. By trading at 121.07 on Thursday, it has met an important projection that could end its decline from May 2011. 121.07 was re-tested later that day, and again on Friday. A process of accumulation with limited price appreciation could now take place. Should that happen, it is unlikely that the SPX will experience much weakness in the near future – which is what some of the above indicators are also saying.
GLD (ETF for gold)
GLD continues its intermediate correction and does not seem very anxious to end it. The 25-wk cycle recently made its low but it has not brought anything resembling the reactions to the previous lows.
There is a possibility that it could move up to 162 before continuing its correction but its time span to do this is limited to the next 2 or 3 weeks. If it has not done it by then, a new low is almost assured -- especially if the SPX starts a correction that extends into October.
The oil complex is of little interest at this time. Long-term weakness has set in. USO had a sustained decline to the level of a former low where it found temporary support and has started a holding pattern from which it could move a little higher, but the upside potential is limited while the downside risk is consequential.
The SPX appears to be in a corrective uptrend which is slated to end by the first week in August, or possibly earlier. That is leading some EW theorists to forecast that a major decline will follow.
Perhaps, but I cannot find any market sign that would justify such expectations. One example is the neutrality exhibited by the SentimenTrader. At the beginning of important downtrends, it is positioned deeply in the red zone.
Even more significant, the Euro Trust (chart below) appears to have completed the decline which it started in May 2011. An important projection has been filled at the same time that positive divergence is appearing in the weekly indicators. This is also the completion of a 5-wave pattern. Granted, it may not be ready to soar upward, but nor does it look capable of declining to much lower lows right away.
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