Turning Points
Week-end Report
By Andre Gratian
Current position of the marketA 3-dimensional approach to technical analysis
Cycles - Breadth - 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
Long-term trend - Down! The very-long-term cycles have taken over and if they make their lows when expected, the bear market which started in October 2007 should continue until 2012-2014. This would imply that much lower prices lie ahead.
SPX: Intermediate trend - The index has been in a counter-trend rally which has the potential of extending in a bumpy ride for several months if/when it can overcome the resistance which lies overhead. There are important cycles bottoming in early May which will affect the market short-term.
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.
Since we all agree that the market is short-term overbought and that it does not normally keep on rising without eventually correcting, this would be a good time to take a close look and see if we may not have reached a convergence of price and time which will bring about a short-term top. Let’s start by looking at a weekly chart of the SPX to get a feeling of the longer-term trend.
As pointed out in the last newsletter, there are two main channels guiding prices, with the brown one being the primary bear trend. The internal, green channel has been very helpful in determining the evolution of the trend by pointing out the resistance lines which are best seen on the daily and hourly charts.
The index has now arrived at the upper green channel line and is at a point where it must make a decision about whether it continues on its upward trek, or turns back down inside the channel. Let’s analyze that the current conditions favor.
The labeling of the structure remains the same. Also note that the momentum indicator is now very overbought, but is not giving a sell signal.
Looking now at a daily chart: on Friday, the SPX broke out of a one-week consolidation pattern and closed at 856.56, practically on the high of the day, and 4 points shy of the standing 860 projection. There is also a Point & Figure (P&F) target at 863 as a result of a little congestion level which formed over the past two days of the consolidation. From a price standpoint, the Fibonacci and P&F projections are good reasons for the index to start pulling back, perhaps after a final short upside thrust.
There are also several reasons for a top to form in this time frame:
• Last week saw the convergence of two potential weekly Fibonacci changes in trend (CITs). There was a daily one on Friday as well.
• An Armstrong cycle should peak about the 16th or 17th.
• There is a nest of cycles that has formed between late April and early May which should be exerting increasing downward pressure into the first week of May.
Since the March 6 low of 667, we have been moving in a (blue) channel (marked on the chart below). Note that the bottom channel line now has 3 price contracts, which makes it a very reliable trend line. A break of that trend line would practically ensure a correction into early May and would have a negative effect on the oscillators. But this may not happen until we are past next Thursday or Friday, after the Armstrong cycle has peaked.
After Friday’s close, all 3 indicators now show negative divergence, the most pronounced being in the A/D. This kind of indicator position relative to price is a big red flag and complements what was said above to form a negative technical picture. The Armstrong cycle could hold up a sell signal for another 2 or 3 days.
The hourly chart (next) also leaves us just a little bit hanging about whether or not a top has been completed. It has not given a sell signal just yet, but with the overbought condition and the negative divergence beginning to appear, both in the momentum and A/D, it does not look like this move is going much higher. Structurally, we appear to have completed a zigzag a-b-c pattern to Friday’s high.
With respect to the indicators, two are showing negative divergence, and the momentum oscillator is overbought. Price is at resistance caused by the intersection of 3 trend lines and losing momentum. We can easily perceive the shift in the degree of ascent which is taking place. Perhaps this means that we will first break the blue trend line and bounce off the bottom of the black channel, then eventually break it, as well.
Analysis always requires a lot of speculation about what comes next, but it’s not pure speculation; it’s weighing the odds. And recently, the odds have definitely shifted in favor of the formation of a short-term top and the beginning of a correction.
As long as we’ve gone this far, let’s go one step further. What kind of a correction will we have? Can’t be too precise until the actual top is in, but as of now, down to 745 looks reasonable.
We don’t have to place our chips on the table just yet. We can wait a few more days to see if our analysis is confirmed. The only thing that I see which could negate the above scenario is if there is a huge positive opening on Monday!
Andre
P.S. I forgot to mention that the QQQQ essentially made its high of the day on the opening thrust, and did not rise above it by more than the 2 cents for the rest of the day – a much poorer performance than the SPX.
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