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March 1, 2009
Turning Points
By Andre Gratian
Monday could be an important reversal day. We may be completing what appears to be a 5-wave pattern from 875, as well as a 5-wave pattern from 780! If the last pattern is not modified in Monday's early trading by going beyond (about) 725, and if the A/D remains above 1200 or 1300 minus (less negative is better), AND if this is followed by a rally which gathers strength with the A/D going positive into the close, there is a good chance that we are at a fairly important low. This would also have to be followed by appropriate market behavior. If we exceed 725, it means that we have a little longer to go to complete this phase of the decline.
Here is a daily chart of the daily SPX. I only want to show you the pattern from 943. It is unfolding in two waves of approximately the same length and the second wave looks like it may be coming to an end. When it does, we should get a rally back to about 800. It could go higher to touch the mid-primary channel line (dashed) but we can deal with its projection later. The odds are that this would not be an intermediate move, but another short-term uptrend similar to the one at the end of the first wave, on 1/21. After that, we would most likely get another decline to about 650 which will be an intermediate-term low.
The oscillators are in a good position to signal a short-term low. They are showing positive divergence for the first time since the 1/21 low. But this divergence needs to hold up until the index reverses.
Let's go on to the hourly chart.
The green channel is the new channel which outlines the present downtrend from 875. It will have to be penetrated on the upside before we have a confirmation that the trend has reversed. More time could be required between now and then; or we could make it short and start reversing on Monday.
Although a reversal on Monday is possible, I am not sure that the hourly indicators are quite ready for it just yet since they are still in a downtrend. If we stick to the bullish scenario described above we should be OK. If not -- and we should know right away on Monday morning by the degree of weakness at the opening -- then it will take longer to complete that 5th wave from 780.
Another indicator that does not seem quite ready to signal a reversal, is the short-term sentiment index [see indicator at left, courtesy of SentimenTrader]. It does not look bullish enough, and this is another reason why I am cautious. Both time periods are positive, but the shorter term is barely in the green. I have not worked with this indicator long enough to know the meaning of all its permutations vs. the market condition. It's possible that we could still have a low just because the longer term is quite positive.There are many signs that we are approaching a low, and we are simply trying to identify the very bottom. Here are two charts which, when contrasted with the SPX, add to the notion that an important turn is not too far away.
The QQQQ, on the right, is the strongest on an intermediate basis. It is well above its November '08 low. The financial index, on the left, is the strongest on a short-term basis. It is holding well above its 2/20 low. I believe that these divergences are very meaningful because these two indices tend to be leading indicators, and they should be the first to show signs of resisting the downtrend. Another leading index is the Russell 2000. It, too, is still trading above its November low.
Summary: Signs that we are approaching an important low are growing, but this may require a short-term rally which can start as early as Monday, followed by another decline to about 650.
Andre
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