Sizing up the S&P 500 and equities markets for the week ahead: Turning Points by Andre Gratian

Note to readers: Andre Gratian provides his "Turning Points" newsletters and reports here, with the reports being adjunct to his periodic in-depth newsletters. You can find them under the "Turning Points" label in the labels list at right, and his Turning Points site is always listed in the "other sites of interest" also at the right side of the page here. Here's his weekend report for the upcoming week:
=============

May 25, 2009
Week-end Report
Turning Points
By Andre Gratian

A 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

From the last Week-end Report (5/17):
The NDX reached its 200-DMA before beginning its correction. The SPX has still not reversed, but the signs that it will do so imminently are everywhere. Let’s review its technical position, and decide on the criteria needed to confirm a reversal.
They are easy to determine! Look at the indicators. A sell signal will be given when the upper oscillator breaks its rising trend line, and the two bottom ones break below the red horizontal line. Price-wise, a reversal below 900 would do it since it would break a support level as well as the main trend line. But a move below 912 might even be sufficient to get things started.

That’s pretty much what happened over the next couple of days, and we have been correcting ever since! The correction has turned out to be fairly shallow and this is clearing up one area of confusion; the top that we made at 930 is looking more and more like an interim top for the trend which started in early March at 667, and not the end of the move. This is what the intermediate indicators have been saying, but the source of confusion was the sentiment
indicator which suggested that a much deeper correction was going to take place. Now, this indicator has moved back toward a neutral position and, by the time the correction is finished, it should look even less threatening.

Let’s start by looking at the SPX daily chart. Since early March, prices have been moving in the upper section of a channel (blue lines). They stopped when they back-tested the red trend line, meeting a Fibonacci projection, and because several cycles were bottoming directly ahead. The cycles and the bearish reading of the sentiment indicator had suggested a deeper correction but instead, at least so far, it has turned out to be mild.

How much longer will the correction take? Until the indicators say it’s over! The middle indicator which represents momentum is now oversold, but is not yet in a buy position. The top one says the same thing. But the bottom one, which monitors breadth is already showing signs of positive divergence, which means that over the next week or so, we could be ready to continue the rally. There are a couple of cycles bottoming in mid-June which could mark the low but, considering the market position, three more weeks seems a little long to wait. We’ll see.

How low will we go before reversing? Could be to the bottom of the channel which is currently in the low 850s and which also happens to be the target for a Fibonacci projection! Also the 50-DMA which is now at about 862 is likely to provide support.

The current support level is between 875 and 880. It has been tested twice, and may hold a third time for reasons given in the next segment. After the correction is complete, we should be able to get an idea of the next and final top and what is still considered to be intermediate wave (4). If anything changes in the proposed scenario, we should know very quickly and will make the necessary adjustment in our analysis.

We’ll now take a look at the hourly chart. The larger picture shows the same blue channel shown in the daily chart. Prices have already broken below the mid-channel line, but they are being supported at the 875-880 level that was tested successfully for the second time on Thursday, after which the index started to move up with the apparent intention of filling the gap at about 902 (light blue line). However, we stalled at 896 and sold off at the close. After the failed attempt I am sure that many traders expected the index to continue moving lower on Tuesday and to break support, but during the week-end the futures tested 880 again, and re-bounded.

In an update, I referred to “astrologers” expecting a strong up-move on Tuesday. That was misleading because there is no consensus. This forecast was made by a competent individual astrologer who has a very good track record, so I would not dismiss it lightly but would also look for confirming market action. Perhaps the market has already spoken!Futures are already trading 10 points above their low, at 890. If the SPX follows up with a positive opening, we could expect a move to a minimum of 901-905, providing we can get above 896.

The pink horizontal lines are current projections for the SPX. They are valid only if the index breaks decisively below 880, and might have to be revised if there is another move up.

Andre

FREE 4-week trial of daily updates available - send an email to: Ajg@cybertrails.com

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.