Burden of proof starting to shift for the equities markets: Turning Points technical analyis update, by Andre Gratian

Andre Gratian has provided his Turning Points market analysis update - his website is Market Turning Points (always included in the sites listed at the right side of the page here):
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August 23, 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

Current position of the market

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. This will not be a straight-down decline, but a series of intermediate-term rallies and declines until we have reached the low point.

SPX: Intermediate trend -The counter-trend rally which started in March is now coming to an end. The objective for a high is being reached and deceleration is becoming apparent. If the top has not already been reached, it should be, shortly!

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

The strong rally to new highs of the past week has done nothing to change the notion that the SPX is making an intermediate-term high. Unless there is a strong follow-through, this could be a blow-off move which will be followed by a severe decline.

In the last Week-end Turning Points Report, the following assessment of the trend was given:
“Intermediate-term trend: After it resumed on 7/13, the counter-trend rally which started in March 2009 was given a basic projection of “about” 1000, but it has already gone beyond to 1018. The re-accumulation pattern which was created between 7/23 and 7/29 on the Point & Figure chart told us to expect a potential rally extension to at least 1013 and perhaps 1021-26 which would be completed by late July, early August.”

The circumstances created over the last few days were the perfect short-term bullish storm to drive the SPX to its higher projection: a combination of favorable economic reports released at the time of options expiration. What has this done to the technical indicators? It has created a more bearish condition than we had at the 1018 high.

Let’s look at the charts!

At the 1018 peak, the daily indicators showed some negative divergence. At the current new high, the position of the indicators vs. price has gotten worse. That does not mean that an immediate top is a sure thing. Potential confirmation will require a few more days during which the index could go slightly higher before turning down again and breaking the 7/10-8/17 price trend line.

While the previous P&F projection was filled on Friday, the short-term correction of the past few days may have raised the target for the final high to about 1037. If 1026 is surpassed, this is where we could end up before reversing. A move beyond this point -- especially one which nullifies the wedge formation and extends the rally to the top of the green channel -- would suggest that we do not yet have an end to the intermediate trend from March.

Let’s look at the hourly chart for refinements.


After meeting its 980 preliminary projection (there were others down to the 940+ area), the SPX went into a reversal with little technical warning and just kept on going, being lifted incrementally higher by positive economic reports and the favorable atmosphere created by options expiration. The move was undeterred by the fact that the A/D oscillator began to show negative divergence on Wednesday and that the overbought-oversold (O/B-O/S) indicator hit 100% overbought at the same time.

That indicator was still extremely overbought at Friday’s close, and negative divergence still showed in the A/D Oscillator. Negative divergence was also just beginning to show in the histogram of the top indicator.

These are conditions for a reversal and since Monday will be without report (they come on Tuesday 10:00), and the options expiration is over, we should have a chance to break the upside momentum and reverse. The index needs to trade below 1021 to break its short-term uptrend line. EW analysts can argue about whether or not we need one more little wave on the upside to finish a 5-wave pattern. And we may need some negative divergence to develop in the O/B-O/S index before we can turn down decisively. Whatever we do, the first two or three days of next week are critical to the market’s direction.

One of the important signs in favor of a major reversal is the position of the daily indicators and the technical tour de force they would need to achieve to stave off their current negativity. There are others. e.g. the fact that the NDX was not quite as eager as the SPX to make a new high, last week, although it did by a fraction.

Another may be even more persuasive. Look at the chart of GS! It has already broken out of its upchannel and came nowhere close to reaching its former high by Friday. A close below the moving averages would take it outside its minor channel, while a close below the red line would be all the confirmation we need that a serious top has been made.


BUT, let’s not close the case until the evidence leads to a conviction! The jury is still deliberating.

Andre