Market at risk for topping, plus dollar and gold updates: Andre Gratian's Turning Points update

A stock market top has been expected for a few weeks, honestly, and that's been straining some analysts' methods by having to re-calculate for price and time (which might even include the February 4-7 time window, we'll see.). To pull it all together, Andre Gratian's weekend report (thanks again, Andre!) combines numerous technical analysis methods. Andre has some important insights in his weekly update, and he was right to assert the last time(s) that the top wasn't ready. But what about now?! I wish I'd managed to post this yesterday (I'll blame the SuperBowl - sorry!) but it's only one day late. Andre uses a full set of technical analysis methods including technical indicators, breadth 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 (including his intraday update subscriber series), at 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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February 6, 2011

Market Turning Points
Week-end Report
By Andre Gratian

Extra caution is warranted in this time period!

There are some good reasons to be cautious early [this] week. First of all, on Friday, the SPX came within one point of its base projection of 1312. There are also some confirming counts to 1310-1311 that were created by the 1273 re-accumulation phase. Another consolidation phase at the 1282 level yields two counts: the conservative one is to 1311 – which was met at the close on Friday. The liberal one would surpass the base count by a few points and take the index to 1317. Considering the fact that we are in a very strong market, reaching that level would not come as a surprise.

I have reproduced the updated projection chart below. This is a log chart, which tends to produce more accurate trend lines. The upside potential is probably limited by the top of the intermediate channel (blue line). The darker green line starts at 1444 and, now that it connects three points, has become a significant trend line. It represents the short-term trend. When it is broken, this should confirm the end of that trend.

A preliminary sell signal will be given when the shorter,lighter green trend line is broken. If 1311-1312 turns out to be the high of the move, we should know it as soon as Monday. If it is 1317, we may have to wait until Tuesday for the top to be reached.

Another reason why we are probably near a reversal point is that there are a number of daily and weekly Fibonacci measurements and cycles taken from previous tops and bottoms which are clustering between last Friday and Tuesday and, considering the fact that we are reaching the P&F projections, they are more prone to suggest a top CIT(change in trend) rather than a low.

From a pure technical perspective, the blue and dark green trend lines on the chart above are forming a wedge pattern, which is bearish and eventually leads to a reversal.

Finally, negative divergence is apparent in all the indicators, both on the daily and hourly charts. Here is theDaily Chart. This is also a log chart with the same blue intermediate channel and same green short-term trend line. You can see how all indicators are diverging from the price, even though it is not that severe in the top and bottom ones. The sell signal will come when the green trend line is broken, as well as those of the indicators.

The Hourly Chart

We have the same picture in this time frame. If anything, the negative divergence is even more obvious, and it is most pronounced in the bottom indicator which is normally the first one to signal a trend change.

The trend line which has been drawn on the middle oscillator is comparable to the short green trend line which is drawn on the price chart. Both should be broken at the same time.

Considering all the factors cited above, the SPX is probably in the last phase of its rally from 1044. Whether the move turns out to be 1311 or 1317, the high may stillbe decided by the action of the dollar over the next couple of days. The dollar (which will be analyzed later on) found support at 77 and had a good rally into Friday. If it opens up on Monday morning and continues to rally, it may curtail any further move in the equity indices. In any case, a break of the minor green trend line followed by a break of the 1295 level will be a good indication that the top has been met.

Dollar

The dollar may be making bottoming noises. Above are charts of the UUP -- the dollar ETF. The Daily Chart is on the left and the Hourly Chart on the right. When the index made its low, four days ago, both the hourly and the dailylower indicators were oversold, and positive divergence had appeared in the daily chart. You can't get a clearer signal that a rally is about to start. Sure enough, the UUP had a good rally all the way up to the hourly chart's down-channel upper trend line where it found resistance and started a consolidation. During the first two days of the rally, the SPX pulled-back– since it normally goes in the opposite direction from the dollar. But on Friday, the SPXmust have felt that UUP was about to consolidate, because it continued its move to a new high.

The dollar P&F chart looks as if it might be building an important base. It is not possible to assign a target to the dollar until the base has been completed. For now, the hourly chart is challenging its down-channel but, as you can see on the daily chart, even if it should break though, it will still be in the lower portion of a larger channel and not yet ready for a sustained move.

Gold

After building a top at 139, GLD started a decline towards its minimum projection of 129 and exceeded by one point before finding support.

The index has now built a small base which could allow it to have a counter-trend rally to 134-135 before resuming its decline. I have shown(on the chart below) the distribution levels from which projections can be made. We have already completed the best-case scenario. The worst case would take the price down as low as 109.

Even if this turns out to be a longer correction, GLD shouldeventually resume its long-term trend to higher levels.

Conclusion: The SPX has essentially reached its base projection of 1312, but the last consolidation area at 1282 yields a potential count to 1317. The best time frame for reaching the ultimate short-term high appears to be Monday or Tuesday of next week.

An oddity which I have never experienced is that the"SentimenTrader" has been getting more bullish as the market moves higher. This probably means that whatever weakness we experience will be limited.

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.