Prelude to Before the Fall? Andre Gratian's Market Turning Points 10/2/11 update

Seems Andre Gratian remains on alert for a buyable low coming right up. What'll it lead to? Hmm... Read his sobering analysis for the stock market below (thanks again, Andre!). He combines numerous technical analysis methods, plus sentiment, and occasionally other markets like copper. You can get more info at Andre's website (including his intraday update subscriber series), at http://www.marketurningpoints.com/. And now, Andre's update (click any of his charts to see it as a larger image):

=============

October 2, 2011

Market Turning Points
Week-end Report
By Andre Gratian

THE BEGINNING OF THE END

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 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, there will be another steep and prolonged decline into 2014 after this bull market has run its course.

SPX: Intermediate trend – Ideally, the 3-yr cycle is due to make its low next week. This should put an end to the intermediate downtrend and start a new 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 ajg@cybertrails.com.

Market Overview

The 3-yr cycle is ideally scheduled to make its low next week and it has brought unrelenting pressure on the market over the past few days. This is why rallies have failed to hold, and why selling is intensifying. We are getting closer and closer to the day of reckoning!

Here is what I wrote in my last newsletter: “The SPX made a double-top at 1220 that created a pattern on the Point &Figure chart from which we can estimate the extent of the decline by taking a count across the 1195 line. We come up with two well-defined targets: One to 1080, and the other to 1040. These are closely correlated by Fibonacci projections. With the 3-yr cycle low about a week away, we could not ask for better conditions to predict the intermediate low.”

In our dualistic world, there are two equal and oppositesides to every event: one positive, and one negative. In Asian philosophy, this is known as the yin-yang principle. The bad news about the current market condition is that if everything happens as it “should”, the SPX will experience another 80 to 100-point plunge into next week. The good news is that afterwards, it should start another intermediate rally which is likely to last into 2012.

Do not forget, however, that what has transpired in the market since May is most likely only a rehearsal for the next market which “should” take place over the next 3 years! Right now, we are only dealing with a 3-yr cycle. In (October ?) 2014, we will witness the bottoming of the 120-year cycle, a phenomenon that no living human has ever experienced. At this time, it is too early to predict exactly when this grand finale will start, and logic tells us that it will not be 40 times as bad as the 300-point decline from 1370 into next week’s suggested low of about 1060, but it should be bad enough. Current estimates are for the SPX to bottom between 700 and 800, but we will have plenty of time to refine this projection.

There is always the possibility that the market will fool us and that the SPX will hold above 1101. If next week fails to bring the significant weakness that is contemplated, bears be careful!

Chart analysis

Just to refresh our memory about the big picture, we’ll start by looking at the Monthly Chart of the SPX. The information that I have provided on the chart is self-explanatory, but I’ll point out a couple of labels. The Point & Figure projection for the 3-yr cycle low is 1080-1040. This corresponds to the support offered by a parallel to the long-term trend line from 1994 drawn across the July 2010 low.

The other is that we can already make an estimate of the potential extent of the next intermediate rally. If the SPX retraces about 50% of its decline, its uptrend should take it to 1212. Assuming that something of that nature takesplace, the price pattern would form the right shoulder of a H&S reversal which started in 2010, and the minimum downward projection of this H&S formation would be about 800, down to the upper final target for 2014.

We’ll continue with an analysis of the Daily Charts of the SPX and QQQ.

There are several things of importance to note on these charts. The last three days reflect steady weakness in both indices, but more so in the QQQ – which is bearish. I have continually pointed out that, on the long term and on a relative basis, the QQQ showed more strength than the SPX which, historically, has been interpreted as bullish. However, over the near-term, the QQQ has suddenly turned this relationship around and become weaker. This is one indication that there is more market decline ahead. Because of its recent action, I am going to revise my projection of the QQQ down to about 49.00, which will represent a new low.

Another indication comes from the MSO of both charts. They are in a confirmed downtrend and show no sign ofbottoming. They could quickly become oversold if we have some severe weakness over the next few days, but will probably have to spend a few more days getting back into a buy position. Can all this be accomplished in a week’s time? The A/D indicator (at the bottom) should be the first to give the all clear signal. For the time being, it too is in a downtrend, so we can assume that we are not ready to reverse just yet.

My Hourly Chart is full of trend lines and channels, as usual. They all have meaning (for me) and represent support and resistance levels. The main ones are in bold,and various channels are in different colors so that they stand out. I have also marked several P&F projections and the distribution areas from which they were taken.

Since its last near-term high of 1195, the SPX has come down steadily with only an occasional intra-day rally which only lasted an hour or two, at best. This has created an oversold condition in the indicators and some minor divergence in the A/D. The MACD is also showing some positive divergence although, since the index broke through the 1140 level at the last minute on Friday (andunless it is a false break which is quickly reversed), we may decline to a lower level before finding a final level of support and making new lows.

With the breaking of 1140 -- an important support level which went back to August and had stopped declines and causing rallies before -- we can probably next expect the SPX to go challenge the 1115-20 support levels. There is a small top count to 1120 which might help hold the decline for a while, but even if we did get a bounce from that level, it would probably be short-lived. If the 3-yr cycle does make its low next week (which would be ideal), and especially if the downward projections are correct, there can only be a thin veneer of support left between Friday’s close and the index’s ultimate destination.

As you can see on the chart, there are several potential lower channel lines which could coincide with the final objective.

Cycles

There is still only one very important cycle left directly ahead, and that is the 3-yr cycle which is scheduled for the end of the first week in October. It could bring a sharp, quick decline to the averages before attempting to send them on to a new recovery high.

Breadth

The NYSE Summation Index (courtesy of StockCharts.com) stopped its rally at the 50-DMA and turned down again. It is not likely that it will make it back down to the August low before turning up again while the market makes its final low, setting up the positive divergence typical of a low of an intermediate nature.

Sentiment

The SentimenTrader (courtesy of same, as the picture at the beginning) does not have much effect on the market unless its long-term indicator is deeply in the green or red. At this point, it would have to be considered essentially neutral and of little predictive value.

NDX:SPX

The NDX:SPX ratio (courtesy of Stockcharts.com) has noticeably deteriorated over the past week. I have consistently pointed out that the QQQ was outperforming the SPX on a long-term basis which, historically, is bullish. This relationship has been reversed over the near-term. As long as the QQQ is leading the SPX on the downside, we can expect more decline.

Dr. Copper – A sign of the times

This is (was) the bull market chart of the copper ETF. There should be little debate about whether or not the uptrend is over. We could argue about whether this is only going to be an intermediate correction or something more prolonged, but with major cycles bottoming in 2014, those favoring the latter will most likely be correct.

“As goes copper, so goes the economy”. Of course, copper is not the only commodity telling us that economic growth has weakened and that we are probably facing a double-dip recession. All commodities have suffered severe losses and this is reflected in the CRB Index. From a cyclical standpoint, there is a good chance that this will continue for the next three or four years. Can gold move against this deflationary trend?

Summary

My heading “THE BEGINNING OF THE END” refers to the last stages of the bottoming 3-yr cycle. Everything about the stock market is telling us that this is occurring and that it could be over in a week to ten days’ trading, but not without more severe price dislocation.

Above, I have given some P&F projections which suggest that the final low could come between 1040 and 1080 on the SPX. We’ll let the market give us the final number.

Andre

FREE TRIAL SUBSCRIPTON

If precision in market timing for all time frames is something which is important to you, you should consider a trial subscription to my service. It is free, and you will have four weeks to evaluate its worth.

For a FREE 4-week trial, Send an email to:ajg@cybertrails.com

For further subscription options, payment plans, and for important general information, I encourage you to visit my website at www.marketurningpoints.com. It contains summaries of my background, my investment and trading strategies, and my unique method of intra-day communication with subscribers. I have also started an archive of former newsletters.

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.

Technicals reveal what politics clouds about stock market: Andre Gratian's Turning Points update

If you only want to be bearish, don't read this technical report by Andre Gratian. His analysis is sound, even though politicians ground the stock markets further down the past two trading days. Folks, I not only believed the $SPX just had to retest toward 1250, but that August 3 would hold good promise for a low. We're about to find out! So give Andre a break on his 1285 projection (and triangle idea - I'm leaning toward it being a flat, but his triangle thought can still be valid above approximately 1249), and check out his measurements of the markets' potential, including technical strength, sentiment, cycles, Fibonacci and point-and-figure projections, wave counts, sentiment and more, in his Market Turning Points weekend report (thanks again, Andre!). You can get more info at Andre's website (including his intraday update subscriber series), at http://www.marketurningpoints.com/. And now, Andre's update (click any of his charts to see it as a larger image; and this is also as Andre's report appeared Sunday at SafeHaven.com, at http://www.safehaven.com/article/21966/market-turning-points):

=============

Market Turning Points
Week-end Report
July 31, 2011
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

"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

Very Long-term trend - The continuing strength in the indices is causing me to question whether we are in a secular bear market or two consecutive, cyclical bull/bear cycles. In any case, the very-long-term cycles are down and, if they make their lows when expected, there will be another steep and prolonged decline into 2014-16 (no change).

Long-term trend - In March 2009, the SPX began a move which evolved into a bull market. Cycles point to a continuation of this trend for several more weeks (no change).

SPX: Intermediate trend - The SPX has met the downside projection for the latest distribution phase and, in doing so, may have completed the intermediate triangle correction pattern which started in February.

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

In the Summary of my 7/24 letter, I stated: "The news from Washington on Friday could roil the markets on Monday if something more positive does not emerge before the week-end."

Apparently, the distribution process was not complete because the roiling did not start in earnest until late Tuesday. Since its 1356 top on 7/21, the SPX had a decline of 74 points before it found a low on Friday, 7/29. The good news is that the decline appears to be over -- for now. The distribution pattern which took place between 7/21 and 7/26 only gave us a downward projection to 1285 on the P&F chart, and the strong rally which took place after the index reached 1283 underscores the validity of that projection.

With the current chaotic condition of the U.S. Congress, and the dangerous game of political brinksmanship which is taking our nation right up to the edge of a potential fall into a financial precipice, along with last week's depressing economic news, it would be easy to make a dire forecast for the stock market. However, for the moment at least, objective technical analysis reveals a mixed bag of positive and negative factors, and these are what we will focus on and evaluate in this letter.

Here are some positives:

As mentioned above, the distribution phase at the 1356 level only had a projection down to 1285. The intensity of the decline took the SPX down to 1283, but it immediately rebounded with a 21-point rally. If the index goes up on Monday and surpasses Friday's 1304 intra-day high, it will most likely be back in "some sort" of an uptrend.

The QQQ's relative strength to the SPX is something which has historically accurately predicted the market trend. Since June, the QQQ has steadily improved its relative strength to the SPX and, at Friday's low, had the strongest relationship for that time period.

The weakness that the SPX experienced from 1356 was not shared by the XLF financial index, another important leading indicator. The XLF had been consistently weaker and in a steady downtrend since the February high. This non-confirmation of relative weakness by the XLF over the past week also argues for a potential end to the intermediate term correction which began in February.

The SentimenTrader, which had dipped into the red at the end of June, is now solidly back in the green.

These positives are not enough to decisively forecast an important low in the market. The confirmation will have to come from the market action itself over the next week or two. There are some negatives as well, such as the VIX closing near its rally high on Friday.

Chart Analysis

We'll start by taking a look at the long term trend. In order to do this, I have placed the monthly and weekly charts side by side. My analysis tells me that we have not decisively arrived at a long-term top. Here is why:

In the Monthly Chart, the SPX is still trading well within the confines of its main (green) channel --roughly at the mid-point. It looks as if it is decelerating, perhaps due to the 3-yr cycle which, with its low due at the end of October, may be beginning to exert downward pressure. The new long-term trend is represented by the gray channel.

Next, look at the indicators. In the MACD, there was no divergence in the histogram at the recent top, and the blue line, although flattening, is not ready to cross over. It is true that in the lower indicators, the lines have just started to cross. It is normal for that indicator to have a correction when it has reached the top of its range, but I have written in green: "no divergence". This is important! If that indicator had made a lower high at this top, it would be a red flag. The MSO is always the first to signal weakness in the market but, at worst, it is only waving a very pale yellow flag right now.

One more thing: compare the position of the MAs between where they are today relative to each other and to price. They are not close to crossing and may not do so for some time. On this chart, remember that each bar stands for one month!

Based on these observations, especially after looking at the next chart, I think that the index could first make a new high, then roll over into the 3-yr cycle low. After having bottomed, the cycle should give the SPX another upward push for a few more weeks or months, and only then finally begin a prolonged decline into 2014-16.

Larger Image

In the Weekly Chart, the indicators have been in a declining mode since February, correcting the uptrend which started in June 2010. The bottom one has already become oversold and has bounced to the 50% line before rolling over again. It is seeking a point from which to start a new uptrend. The MACD is doing the same thing except that it is not as volatile as the MSO, and not as good at identifying overbought/oversold conditions.

Although the wave structure is still not conclusively determined, my preferred thinking is that the index has been making a diagonal triangle consolidation since the February high, and is now coming down into the final "E" wave (which could have made its low on Friday at 1283). If that's the case, another uptrend is about to start, rising out of the triangle formation to make a new high.

The Daily and Hourly Charts are also side-by-side. The former shows that the price, once again, found support above the 200-DMA and the long-term uptrend line. Those two combined provide good support and, since we have filled the downside target of 1285, the odds are good that we have made some sort of a low which may turn out to be the low of the "E" wave of the triangle.

The lowest indicator (A/D) is the strongest of the lot and, by showing strong positive divergence on Friday, gives us another reason to expect that Friday might have been the low of the decline. However, it has not yet crossed the slower pink line and gone positive, and the other two indicators are still declining. This suggests that there may be more work to do before getting another short-term buy signal. Only when all the indicators have reversed, gone positive, and broken out of their downtrend lines can we start talking new uptrend.

Larger Image

The hourly chart came very close to giving a buy signal on Friday, but the index could not close outside of its downtrend line. As soon as the index can close above 1304 on an hourly basis, we should have started a near-term uptrend.

This may seem a little far-fetched, but the two last two consolidation patterns look like a stretched-out H&S formation. The neckline is the same as the downtrend which must be broken to signal a potential break-out.

Because of the condition of the daily indicators it is going to be difficult to immediately go through the trend line which connects the two tops. Most likely we will pause and consolidate after touching it and, at worst, we may even need one more pull-back to test the 1283 low.

Cycles

Because the SPX went below its 1296 low, I have to consider the possibility that the 9-mo cycle may already have failed, which would be a strong negative. But it may also just now be making its low, one week late.

The next cycle will be the 13-wk cycle, due about 8/22. It will be closely followed by the 14-15-wk cycle due to make its high on 9/18.

The 3-yr cycle should bottom around the end of October and, if the economy continues to show signs of anemic growth, it is not inconceivable to see the market correction extend into that time frame. That would produce a choppy, essentially sideways market for the next three months.

Breadth

The long-term pattern of lower highs continues. Note that the 1295 low on the SPX only shows up on the Summation Index (courtesy of StockCharts.com) as a minute squiggle, and that the lower tops are coming in at lower and lower levels, giving an impression of downside acceleration. It would become a concern for the bulls if this index broke below its previous low.

Since this negative pattern is not supported by other indicators which are more bullish, it is not something to really worry about just yet, but we need to keep an eye on this index. If the SPX is going to make a new high, it needs to firm up and give us a more positive picture.

Sentiment:

The SentimenTrader (courtesy of same) is one of the important indicators giving us a much more positive picture.

The short and long-term combo registered on Friday adds another dimension to the probability of having made a low -- at least a near-term low!

I mentioned earlier that the ratio of NDX to SPX had been improving steadily. Look at the graph below! It's rocket propelled! Does that look like the kind of a pattern that is made at a market top?

The VIX is one of the current negatives which must be acknowledged. Here is its Daily Chart. Over the past three months, it has been making a series of higher highs and higher lows. This is a bullish pattern for the VIX -- and a negative one for the market.

There are some minor positives (for the market): The VIX is overbought and at resistance, which could mean a near-term top. But it could subsequently make a new high before starting a bona fide decline. There are no signs that it is now ready for an important reversal.

Could the SPX make a new short-term low before making a new high? In order to remain objective, we need to weigh what all indicators are saying. Right now, they are presenting a mixed picture.

To expand our perspective, let's review two indices which have proven forecasting value.

COPPER (daily chart)

There is no apparent weakness here! The index has ignored the entire decline and closed near a recovery high on Friday.

The bottom indicator does show some negative divergence, but it is not confirmed by the MACD and therefore not a decisive indication that a top is in the making.

The index also has a P&F target of 61 which, if reached, would signal a potential double-top - a more serious sign of topping.

For the moment, the Copper chart supports a bullish case for the market.

Larger Image

XLF - FINANCIAL SELECT SECTOR SPDR (daily chart)

The XLF chart is very interesting because it clearly and specifically identifies the market pattern. While we can argue about whether or not the SPX is in a triangle correction, this chart tells us, without ambiguity that the market top occurred in February (By the way, it also pin-pointed the market top in February 2007, several months ahead of the SPX).

It is also telling us that the market is at a critical point. If this index reverses its trend here, there is a good chance that we are witnessing the end of the intermediate trend which began in February. The chart indicators are both showing positive divergence, which gives hope to the bulls that this index has completed an intermediate downtrend. However, although positive divergence very often precedes a market reversal, there are times that it does not. We need to see a price reversal out of the down channel for confirmation.

The P&F chart favors a move to 18. It also tells us that, based on the distribution pattern that was created at the February top, the index has reached its downside projection. That gives a little more credibility to a completion of the decline from February.

Larger Image

I won't show its chart, but TLT is also a very good indicator of market trends. It works like the VIX, in inverse correlation to the SPX, and its chart and indicators are very similar to those of VIX.

On Friday, TLT touched 98 and closed a little bit below. It's P&F projects a high of 103. However, it also indicates that there could be a significant pause in the uptrend after it reaches 98.

Summary

The market indicators are a mixture of positive and negative signals. They probably exemplify a market which is in an incomplete corrective mode. The faction which eventually gains dominance will determine the direction in which the market emerges from this correction.

Near-term, a favorable resolution of the political crisis in Washington will probably favor the bulls, but that may not mark the end of the correction.

Patience! This too will pass!

---

FREE TRIAL SUBSCRIPTON

If precision in market timing for all time frames is something which is important to you, you should consider a trial subscription to my service. It is free, and you will have four weeks to evaluate its worth.

For a FREE 4-week trial. Send an email to:ajg@cybertrails.com

For further subscription options, payment plans, and for important general information, I encourage you to visit my website at www.marketurningpoints.com. It contains summaries of my background, my investment and trading strategies and my unique method of intra-day communication with subscribers. I have also started an archive of former newsletters.

Content copyright 2011 Andre Gratian;
Image & XTML renderings copyright 2011 Safehaven.com