Week-end Report
Turning Points
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 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 - May be reversing! The intermediate move which started in March is coming to an end. But we will need confirmation.
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
Discussion
We have been waiting a long time for the longer cycles to turn, and it looks as if they may have when the SPX reached 1080. There was a Fibonacci projection to 1080-85 for the move which started at 667. That projection was satisfied. Some of the signs that normally appear at an important high are still missing, and that makes me a little cautious about declaring 1080 the top of the intermediate wave, especially when we still have not broken the primary uptrend line. An ultimate confirmation that we are in an important downtrend would also require that we trade below the last short-term low or 992, and that does not appear to be imminent as we are very oversold short-term, and should be ready for a rally.
That said, there are enough negative signs to at least call 1080 a probable intermediate top and wait for confirmation. The EW structure may solve our dilemma. If this is wave 1 down, we may have to wait for wave 2 up to be completed as a test of the highs before we have some real weakness. Wave 1 down would probably be over by 10/12-13, which is a time frame during which several cycles are making their lows, including the 22-wk cycle. The kind of rally we get after the cycles have made their lows will be watched closely. There is a tendency for the stock market to make a low in October, so what we are doing is not unusual. It is what happens afterwards that will be useful in determining the nature of the intermediate term.
Let’s look at the charts:
On the Weekly chart (above) the SPX met resistance at the intersection of the two dashed lines and the top line of the wedge pattern. Last week was the second consecutive down-week, closing near its low. The lower indicator has broken its trend line and accelerated downward. The MACD is beginning to roll over but its lines have not crossed yet. Since there is no sign of deceleration, we can assume lower prices ahead, but the index could find support on its wedge trend line and a former top (dashed line) before moving lower.
From an Elliott Wave perspective, we have probably completed “C” from 667. Let’s go to the Daily chart (below)!
The index found support on its 50-dma on Friday and closed at the bottom of its channel from the top, still about 15 points above its primary uptrend line. The oscillators are oversold and probably ready to turn, but they are not yet ready to give a buy signal. This will probably occur after we have reached the time frame where we have several cycles bottoming together, around 10/12-13.
The most negative aspect of this chart is that the MACD has been in a series of lower highs and lows since August, and now it has broken a trend line which started at the March low. This is a precursor to the primary trend line on the chart being broken -- probably by the time we make a low on 10/12-13.
Note that on the Weekly and Daily charts, I have drawn parallels to the top line of the wedge pattern. These are lines where we could find support on the way down.
Now we’ll look at the Hourly chart (below). The downtrend from the top has created a channel which was penetrated on the downside in the first hour on Friday, after which prices jumped back within the channel and traded sideways for the rest of the session. This caused the indicators to be in a position to give a buy signal as soon as we have an up-tick in price. The index is already trading outside of its downtrend line, and if it trades above 1030, it should be back in an uptrend.
From an EW point of view, if we have made an important top at 1080, this would probably be wave 4 and could reach into the low 1040’s before resuming the decline as wave 5 into the cycle cluster low. If we do this, it will alleviate my concerns about not having all the required signs for a high at 1080 and the possibility that we might be making an a-b-c pattern which should then be followed by a new high. I will also want to see what GS does in the next couple of weeks. As of now, it is holding up a little better than the SPX.
There is a 10/22-23 Bradley ahead. We’ll have to consider what that could bring in the overall structure.
Summary: We have made a top of some sort at 1080, but until we get more confirmation, we cannot call it an intermediate top.
EW International and others have called it the end of primary wave 2, which would mean that we may have started wave P3. If this is true, we should not complete wave 1 of P3 until the cycle lows, around 10/12.
I am not convinced that this is the correct interpretation of the long term but, just in case, since this would mean a great deal of weakness is directly ahead, let’s be watchful. The market will tell us soon enough.
Andre
website at: Market Turning Points (always included in the list at right here)
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