by Andre Gratian
June 28, 2009 update - Andre has been unable to prepare a full Newsletter update due to an illness this weekend (should not be severe, we certainly are hoping). He has authorized me to post something for readers using his charts from Friday afternoon, June 26, and comments he has made during the last few trading days [with my (Ariel) wording inserted in a few places for clarification]:
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 counter-trend rally which started on March 6 is still up, lost momentum after the SPX hit 956, then reversed into a low last week.
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
Overview:
The bear market secondary reaction is still intact. After losing momentum, the market declined from SPX 956.23 to a short-term low last week at 888.86. What's next?
Some are expecting a great deal of weakness to develop in the equities markets. [Many people are seeing the formation of a "head and shoulders" (H&S) pattern and expecting the market to break under its neckline about 880-888, to fall lower.] However, this is not what the A/D (advance/decline) behavior is telling me. Mid-week this past week, it reached the highest positive number in the whole month of June. Since it was not countered by extremely negative numbers later in the week, it was a sign that we are near a turn [as Andre communicated to his subscribers].
The other positive is that the NDX outperformed the SPX, both on the upside and in the pull-back. These signals were a departure from the trend down from SPX 956 and provided preliminary signals. The daily indicators were oversold and showing a bottoming pattern mid-week last week. As I expected, this was followed by the markets turning up immediately afterward.
At the same time, both indices, SPX and NDX, did not break [underneath] their trend lines and channels. If they had been going to make a new low, 878-880 would have been the likely target. That's a major support level. If broken, we were looking for a potential move to 840-850.
But - The NDX cleanly broke out of its down channel last week, in what looks like a 5-wave pattern. This is bullish. The SPX broke above its downtrend line. Both were approaching the end of their first up-wave. For the SPX, the target was about 918 [met now]. The NDX may already have met its initial target. Then, the SPX futures' projected correction level from that first upwave was at about 910-912 [the level expected to provide support].
It is now apparent that the SPX low was made on 6/23, but there was enough uncertainty in the price action to delay confirmation of a reversal until later in the week. This was the "B" part of the A-B-C counter-trend rally which started at 667. After the new short-term uptrend "C" wave has run its course, a severe decline will take place as the bear market resumes its downtrend.
So for now - The market movement last week represented the end of the decline [the "B" wave] from 956, and the beginning of a new short-term uptrend [the "C" wave to complete the counter-trend rally that started at 667].
The weakness on Friday was correcting the first thrust of the new rally which is expected to last for several weeks, perhaps into the end of July. When the SPX has finished this small correction it should challenge the 927 level successfully and move to about 946 as its next target.
Technicals:
The longer term charts show that the market is overbought and vulnerable, but no sell signal has been given just yet. There is not "give" to the rally - no one wants to sell. This a sign that we want to go higher. A move above 920 could get something started. Actually, the sell signal when it arrives, will come from the daily chart, and that one just gave a buy!
The hourly oscillator needs a little more work before we are in a position to move higher, so the market ended up sideways on Friday. For that matter, the other oscillators are still overbought. On Monday, we should get a little more consolidation before moving ahead.
The pattern of the A/D over the past two days has been typical of a reversal and break-out with the best positive numbers since the decline started. The NDX already made a new high which went slightly beyond its 6/19 high, but pulled back.
There is a possibility that the correction [from the first upwave of the "C" wave] will be very short. Buyers are stepping in on every dip. The momentum indicators were overbought late Friday, and may want to correct before we move higher, but in a strong market, they can stay overbought for a while as prices move higher. The A/D of both indices were slightly negative.
It is difficult for the market to move ahead if the A/D index is not ready. On the 60-minute chart (below), the bottom oscillator (A/D) may not be ready for a break-out, just yet. It will have to turn up first.
And the 30-minute chart is below:
[The NDX:SPX ratio chart is at left, courtesy of Stockcharts.com.
As mentioned above, the NDX is leading the SPX upward, which is bullish.
Sentiment did become more positive as indicated by the SentimenTrader gauge.
But it doesn't necessarily signal that the markets won't continue up with an overbought continuation of the rally.
It is likely that a continued consolidation on Monday will help to correct sentiment in any event.
Breadth as measured by the McClellan Oscillator - moved upward as the markets moved up out of the lows last week.]
Summary:
I have felt all along that the cycles called for a move into July before we found a top.
Now that the correction is over, and with the move out of it expected to continue for several more weeks, it is very likely that we will see new highs instead of simply a test of the highs. Let's put the H&S idea into the background. We can always resurrect it if we appear to stall around 946. A new high could be as high as 985.
Andre
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