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December 26, 2010
Market Turning Points
Week-end Report
By Andre Gratian
The longer-term trends are intact. Neither the Bull market, nor the intermediate up-trend is in immediate danger of reversing. A month ago, the intermediate term appeared to be faltering, but it has recovered nicely. Since we are expecting a reversal to take place from the 1259 level, it should be, by deduction, of short-term nature.
In order to analyze the current market position, we can move directly to the Hourly Chart. It has all the information we need.
The re-accumulation area which was created above the 1273 level had given us two solid projections on the Point & Figure chart: the first to 1248 and the second to 1260. A short reversal took place from 1246+ down to the lower trend line of the blue channel. The SPX found support on the trend line, and crawled along it until it reached the higher target.
Whenever the index reaches a valid projection, it reverses. The size and length of the reversal depends on a number of factors including the market’s technical condition, sentiment, and – for the time being -- the dollar trend. We’ll examine each of these to draw our final conclusion.
The most telling indicators about the technical condition of the market are the A/D oscillator, at the bottom, and the price MACD, on top. From the second week of December, the A/D has shown very little support for the uptrend. At about the same time, the MACD started a declining pattern and crossed over on the down side the day after the SPX reached its peak.
Those are the signs of a trend which is coming to an end. The middle oscillator pin-pointed the top of the rally by giving a sell signal within a couple of hours after the market met its target. That indicator is still in a downtrend, suggesting that the initial selling phase is not complete.
Another technical sign that the rally may have come to an end lies in the fact that the important blue channel line which originated at the 1274 level has finally been broken decisively.
I should point out that, in spite of all these negatives, a confirmed sell has not yet been given. For this, we would need to see a daily price close of 1247 or lower, and more weakness in the A/D which would need an hourly close of -1500 or more.
There are two short-term cycles scheduled to make their lows in early January. This gives additional credibility to the expectation of a reversal in this time frame.
Another sign that a top is brewing is the action of the VIX – a favorite sentiment gauge --which has reversed from its steep decline and is beginning to show some strength. Here is the Hourly Chart of the VIX vs. the SPX. Like the SPX, the VIX has not given a confirmed reversal signal but, after reaching the same level as it did in late April (when the SPX made an important top) it had a strong bounce which broke a couple of down-trend lines. If a top has been made, the VIX should continue up and the SPX down.
Dollar
The most likely trigger for a market correction would be continued strength in the dollar. The following charts ofthe dollar ETF (UUP) show the Daily chart on the left and the Hourly on the right. In the last Week-end Report, I showed a Weekly chart of UUP which gave a bullish picture of the index. The assumption is that itmay have started an intermediate uptrend in early November and, judging by the daily chart, is consolidating before moving higher.
The hourly chart tells us that the consolidation may be nearly over. The bottom oscillator is oversold, and the MACD histogram, above, is beginning to show some deceleration. I suspect that the dollar will have to resume its uptrend before the decline in the SPX fullytakes hold.
Conclusion: All three indices – the SPX (S&P 500 index), the VIX (volatility index), and the UUP (ETF for the dollar index) – have either barely started a reversal, or need a little more work before a reversal takes place. Because of the position of the longer-term indicators, a reversal is expected to initiate only a short-term downtrend. For now, I’ll stick to a downside target of 1206, but will revise it if needed when the top is confirmed.
Gold
Not much has happened with GLD. It started a near-term consolidation when it double-topped at its 139 projection and, if/when the SPX begins to correct, it will most likely continue this consolidation.
The distribution pattern which is being built on the Point & Figure chart allows us to estimate the potential depth of GLD’s correction.
The near-term projection is 129. If this is exceeded, the next target would be 123. And if we get a marketcorrection which is deeper than anticipated, it could pull GLD all the way down to 112. The technical position of the ETF when it reaches each target will tell us if the correction is over, or if it is likely to move down to the next projection level.
Andre
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The above comments about the financial markets are based purely on what I consider to be sound technical analysis principles. They represent my own opinion and are not meant to be construed as trading or investment advice, but are offered as an analytical point of view which might be of interest to those who follow stock market cycles and technical analysis.
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