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October 18, 2009
Turning Points
Weekend Report
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 - The intermediate move which started in March may be coming to an end, but signals are mixed. It is possible that we will end up with just a correction in an uptrend.
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:
By any technical measurement, the S&P 500 (SPX) is still in an uptrend, both from the intermediate low of 667 and from its last short-term low of 1020. But for the first time since March, the Weekly chart is showing some negative divergence in the momentum indicators. The price is still making a wedge pattern and trading at the top of the wedge where it should encounter resistance. The MACD indicator is showing deceleration and is ready to cross. When it does, this is most likely when prices will challenge the bottom trend line of the wedge pattern. We will not have an intermediate sell signal until that trend line is broken and followed by trading below the recent short-term low of 1020. How close are we?
Close enough that we could even have made our high last Thursday. From a time frame stand-point, we had discussed the importance of the 22-wk cycle inversion which should have come, ideally, on 10/12, but could have been affected by the earnings report of GOOG and IBM coming on 10/15. We did make a high on 10/15 with negative divergence on all three indicators as you can see on the Daily chart (below). We also had targets at 1092/93 which were reached, and to 1109 which is still unfilled. 1096-1097 should have been included as a potential target as well, since there was a Fibonacci measurement which led to that level, but not one that I normally use for projections. Still, it may turn out to be the one which stops the rally, depending on future action.
As mentioned earlier, all the daily indicators show negative divergence. The MACD and A/D indicators are competing for the worst position, and we had what could have been an exhaustion gap in the index -- marked by the blue horizontal line -- which demands to be filled. It may be creating a little “island” in the price above that line, and if prices gap down below the blue line, it would create an “island reversal” which would be very bearish and definitely indicate the end of the rally from 667.
But we don’t need to see anything so dramatic to have a top. Putting an end to the short-term rally from 1020 would be a start, followed by a successful challenge to the green trend line which is the bottom of the wedge pattern.
There should be plenty of initial support as we near the bottom of the wedge. Prices will have to break through their 34 and 50-day moving averages (DMAs), both of which are capable of stopping the decline, as they have in the past.
On the last pull-back, the (blue) 50-DMA turned out to be the perfect support which led to a strong reversal. On the previous one, it was the 34-DMA (green) which acted as support. The next time they are challenged, it’s very likely that, after a bounce or two, we will break through and keep going, and the indicators, with their divergence, may be suggesting that time is near.
The Hourly chart (below) shows that we did make a top on Thursday and, after an initial down-thrust, found support on the 34-hr MA and had a little rally which could be either a “b” or “2” wave.
The gap below is outlined by light blue lines. If we simply rally after touching the 50-hr MA and without filling the gap, we will have a good chance of making one more attempt at the 1109 projection. There are many possibilities here, and it’s best to wait and see what the market wants to do instead of listing them all. What we know is that a short-term sell signal will occur when we break below the moving averages (MAs) and the channel line. We have already broken the trend line and back-tested it. We’ll now have to see if we continue lower to challenge the main trend line below.
One of the requirements that I had for a prelude to an intermediate top is that we see some underperformance by the Nasdaq 100. This is happening. There is also some underperformance by the Russell 2000 which can also be an indication of an approaching intermediate top. What is still lacking is more negativity in the sentiment indicator that I follow. I’m not sure that this is absolutely necessary, but it could mean that we are not there, just yet!
Another index which needs to be closely watched is the dollar index (above). It appears to be in the same relative but inverse position as the SPX and ready to give a buy signal at any time, which would generate a corresponding sell signal in the SPX.
Andre
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