Dollar's price target augments technical forecasts for stock market (and gold): Turning Points update by Andre Gratian

The stock market was choppy last week with all the concerns from the euro zone (and to some extent, deflation), soaring Wednesday after hitting support levels; then weakened again on Friday. What's next? Andre Gratian shares his insights, focusing primarily on the S&P 500 index ($SPX) plus the dollar and gold as well. He uses a full set of technical analysis methods including technical indicators, breath and strength, trendlines, cycles, Fibonacci and P&F projections. Andre also keeps a good eye on sentiment. You can get more info at Andre's website http://www.marketurningpoints.com/. And now, Andre's update (click any of his charts to see it as a larger image):

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November 28, 2010

Turning Points
Week-end Report
By Andre Gratian

There is some indication that the SPX made a short-term top at 1227 and that the consolidation is not over. The index has been trading in a tight range within the lower half of its up channel from early September. The indicators – which are showing some mild positive divergence -- are trying to get back into an uptrend, and will do so if the 1200 level is cleared decisively. The uncertainty of what comes next over the near-term is caused by two off-setting cycles, one bottoming and one topping on the ideal dates shown on the chart. Since there is no way to determine ahead of time which of the two will be the most influential on prices, we’ll just have to wait it out for the next few days.

A clue may be found in the US dollar which continues to affect the equity markets inversely to its trend. The dollar is in an uptrend which may have farther to go but, for the time being, it is overbought on both the daily and hourly charts. On Friday, some negative divergence was showing in the hourly indicator, but it was erased by today’s strength and it may have to be re-established before a correction can set in.

On Friday, the dollar closed at 80.35. The 1X1 Point & Figure base that formed at the 77 level suggests a potential move to 81. On the .50X1 chart, the count extends to 81.50. All the dollar time frames show that it is in an uptrend, but also that it is extended. If the dollar reaches the 81.50 projection or slightly higher (P&F is only concerned with round numbers) it will run into its 200-dma which should provide some resistance, and gives credibility to the suggested target.

Look at the indicators on the Hourly Chart of the UUP which is the dollar ETF. They are overbought but show no negative divergence. I interpret this to say that a minor correction is likely, followed by a move higher at which time negative divergence should appear. The MACD is usually a reliable indicator when it shows a loss of momentum and negative divergence to price. Currently, it is neutral.

Based on the ratio of 3.448 which existed between the two indices at the low of the move, the ultimate target for the UUP should be about 23.60.

Now let’s go back and analyze the SPX Hourly Chart to see if we can get a better feel for the near-term trend.

The decline from the 1227 top came to a halt at 1173, but since then, the SPX has not been able to get back into a decisive uptrend. The trading range between the low and 1200 will either turn out to be a base from which the index can attempt to extend its rally, or an interim consolidation in a downtrend. This should be clarified next week.

As of the close Friday, two of the three indicators were in a downtrend suggesting that the decline from Wednesday’s close may not be over and that one more test of the last short-term low of 1177 is coming. Note also that, ideally, the 90-day low is still ahead, as well as a 13-day cycle (green asterisk). Assuming that the last decline extends itself by a few points, and that there is one more rally into the black asterisk time frame which indicates a cycle top, the entire sideways pattern would probably end up as a triangle (or a rectangle) which would be followed by a break of the 1173 level to at least 1165 -- the next downside target. It remains to be seen whether or not we make it all the way down to the full projection of 1145. This will depend on the amount of confirming distribution which has taken place just under 1200.

While the estimated forecast stated above has merit, it will have to be confirmed by subsequent market action.

GOLD

GLD has been consolidating ever since it reached its 139 projection. The projection came from a H&S re-accumulation pattern which formed at the 81 level. There are potential, higher, longer-term patterns for gold, but even if it moves a little higher over the short-term, the odds favor the development of a significant top in this area, probably one of intermediate nature. However, the completion of such a top – if this is what it turns out to be – may require a few more weeks of trading around this level.

Gold moves essentially in stride with the SPX, and if additional distribution forms in that index over the near term, additional distribution will also form in GLD (as the dollar moves to its 81-81.5 projection). In the case of the ETF, the size of the distribution pattern will also determine how much of a correction takes place if the scenario depicted for the SPX plays out.

SENTIMENT

Another reason I do not think that the market has reached an important top is that the long-term index of the SentimenTrader (courtesy of same) is not yet at a bearish enough level. Historically, the bar has to dip much deeper into the red.

Andre