Week-end Report
Turning Points
By Andre Gratian
The intermediate trend of the SPX and other indices is in limbo! Although the recent 5-day decline was the steepest of the rally from the March 667 low, it did not confirm that the trend has reversed. Hopefully, we should know by next week if 1039 was the top or if we need to make a new high before reversing.
The former 992 support level held off a bottoming short-term cycle for two days and refused to be broken.
Now, the index has rallied to a resistance level which may stop it. If the first layer of resistance at 1016 which was reached near the close on Friday does not, the second one at 1021 has to, or we stand a chance of going to a new high. Both resistance levels coincide with a P&F target, but the one at 1016 has the advantage of being reinforced by a fib. count. Let’s look at the charts!
The Weekly chart gives us a picture of a market which is overbought, making a weak technical pattern, beginning to decelerate and develop divergence, but resisting reversing. There is resistance above, and it may have completed a EW corrective pattern. It’s only a question of time as to when it will reverse. The chart also reflects the ambivalence of views about whether the longer term cycles have already turned down, or if they are just about to.
That we have a reversal coming is not a question of if but when, and the attention will soon focus on what kind of reversal: a simple correction, or the resumption of the long-term downtrend. Let’s deal with the first problem first, and look to the daily chart for some answers.
The chart shows that we may have started to reverse, but this remains unconfirmed. We remain above the 979 former low, above the 50 DMA (blue) and above the green trend line which marks the bottom of the ascending wedge pattern. Last week’s attempt at changing the trend stopped at the very strong 992 support level. From there, with the indicators oversold, we have launched a rally which is either an attempt at extending the uptrend, or an oversold bounce which has now reached overhead resistance and is about to peter out.
The indicators only confirm that the market was oversold and, because of the strong bounce, they have turned up but not yet produced a buy signal. The momentum oscillators, especially, appear to have more work to do before we can get one. In other words, the market would have to have a strong follow through, perhaps after a brief period of consolidation. On the other hand, if genuine weakness reappears instead of a mild correction, and we break below 979, we will have a confirmed reversal.
Let’s now look at the hourly chart (below) to see the position of the short-term trend.
Friday, after reversing its short-term downtrend, the SPX stopped at its first resistance level and target. I have drawn a channel which represents the new short-term trend. It may have to be altered if the index follows through on the upside Tuesday morning. The next reversal will come when prices move out of it, on the downside.
How close are we to doing this? The indicators are overbought without divergence, and there are two minor cycles due to make their lows on Thursday. This suggests a correction into the end of the week.
The next few days will tell us a great deal: how high we go before correcting and how much weakness develops in the coming decline. Friday’s volume was very low if you subtract Fannie’s and Freddie’s which, combined, accounted for about a third of the total.
We cannot make a solid forecast based on what we have, so far. We need to see what the market will do over the next few days. One thing that is lacking is relative weakness in the NDX. We do have some in the financial index and GS. That’s important, but I would like to see the NDX join in. Maybe next week!
I would also like to see more bearish readings in the sentiment index. I don’t think it can do that unless the market moves higher!
Andre
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