Stock market cycles, technical resistance and sentiment combine to post (near-term) obstacles: Andre Gratian's Turning Points update

Andre Gratian turned bullish the stock market quite early, definitely early enough for his readers and subscribers to take advantage of it! So of course we want to know what his weekend update has in store. His work focuses primarily on the S&P 500 index ($SPX) but he's taking another look at gold as well. Andre deployes a full array of technical analysis methods including technical indicators, breath and strength, trendlines, cycles, Fibonacci and P&F projections. I wasn't able to post Andre's weekend update until this evening, but am delighted to share it now because his stock market views are invaluable and we really appreciate being able to share his weekly updates here. Of course his subscribers received it over the weekend, as well as getting his intraday updates via several emails each trading day. You can get more info at Andre's website http://www.marketurningpoints.com/. And now, Andre's update:

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October 17, 2010

Turning Points

Week-end Report

By Andre Gratian

Even the strongest of markets has to correct sooner or later for a variety of reasons, and a market which is about to correct will usually give technical warnings. The SPX has good reasons to do so at this time, and is also waving some red flags.

The rally which started at 1041 had a potential base Point & Figure projection to 1168 and a Fibonacci projection to 1176. Both were surpassed, which is not surprising considering the bullish fundamental circumstances which occurred at the time that the targets were being reached. When a valid projection is met, it is normal for a correction to occur. Surpassing the target does not absolve the index from that obligation.

Another reason for a short-term top is that two cycle bottoms lie directly ahead, and it would be highly unusual for them to be completely ignored by the market. I originally expected the lows to occur around 10/18-20, but I am going to give them a little more leeway and look for the 17-wk cycle to probably occur around the end of next week in conjunction with the 26-trading day (td) cycle. The 9-month cycle is more difficult to pin-point. Its phases are irregular and can vary quite a bit from the ideal 37-38 weeks.


Finally, there are 3 resistance lines converging around 1180. These are all good reasons for a correction to develop from this price level.

The technical warnings are also abundant. The three indicators at the bottom of the chart are either showing a loss of momentum, or negative divergence. The breadth indicator is the worst performer and may already have started to give a sell signal on Friday.

Independent from the price action, another warning comes from the VIX which has reached a level very close to that of its April low, and it is beginning to show signs of bottoming. (The $VIX moves in an opposite direction from the $SPX).

On top of that, there are also good reasons for the dollar to bottom in this area -- at least temporarily -- and for gold needing to consolidate.

The Hourly Chart gives us a clearer understanding for what is needed for a reversal. Ever since the 1041 low, the SPX has traded inside an ascending brown channel. It has gradually moved from hugging the top channel line to trading near the lower channel line -- a sign of deceleration.

The green line is the trend line from 1041. When that line is broken and the index trades below 1166 (red horizontal line), the index should also move out of the brown channel. This will end the phase which started at 1041 and give way to a correction.

The steepest (thin, black) trend line which delineates the interim phase from 1132 withstood Friday’s selling pressure. It will be the first one to be penetrated when we reverse.

Last week’s decline from 1184 to 1167 has caused the hourly indicators to become oversold, so there may be another attempt at going up before rolling over. If there is another rally, the index could reach about 1188 before the decline begins.


It would be premature to give a downside target for the correction before the distribution phase is complete, but there is a chance that we might fill the gap around 1137 before resuming the uptrend.

Gold

I have been trying to determine price targets for GLD without taking in consideration the large re-accumulation base above 70. I used smaller re-accumulation phases above that level to derive projections, and it gave me a count which was inaccurate. I could not get a Point & Figure chart from Stock-Charts, because they do not have one available which extends back far enough. So I decided to create my own from the daily chart. The results are shown on the GLD weekly chart which follows.


The re-accumulation phase in the form of a double H&S pattern above 70 is substantial and has projections far beyond the present price level. But, as you can see on the chart, the ETF has reached the target level generated by the smaller head and shoulder, and this should result in some consolidation before it can move higher.

Andre