Stock market showing stronger signs of this next move: Andre Gratian's Turning Points update

By several methods, a stock market top was expected in January that would lead to a low in February or March. Well the market only got choppy a couple of times, consolidating rather than reversing. Now some methods are again flashing that a top of some level could happen. 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 previously when a top seemed close but wasn't ready. Maybe the market was just "crying wolf". 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 20, 2011

Market Turning Points
Week-end Report
By Andre Gratian

SPX analysis

Weekly chart

The weekly trend is up, with no sign of topping since the indicators are still strong and there is no divergence. This does not prevent a minor correction from occurring, but an intermediate one will probably have to wait until negative conditions appear.

The only warning comes from the cycles. The brown asterisk indicates a potential top (as it has signaled in the past), and the 17-wk cycle is due to bottom over the next two weeks. Other cycles are also involved, as we will see later.

Daily chart

At first glance, there doesn’t seem to be any weaknessshowing in this time frame, but the indicators are starting to tell a different story. Some divergence is showing, and the cycles directly ahead are suggesting that some near-term caution is warranted. Also, the index should be encountering resistance from the top trend line of the intermediate channel.

If we do start a correction from here, how significant will it be? Are we ending the third phase of the move from 1041? Everything considered this is probably unlikely. The last phase appears to be accelerating instead of showing the deceleration which comes at an important top. Any correction would probably be fairly shallow and of short duration.

When it is broken, the short, steep trend line should give a sell signal. It forms a small wedge with the top line of the intermediate channel – a sign of weakness. But since the index has already gone past two- thirds of the total wedge length, this suggests that any decline will be short-lived as long as the light green trend line from 1041 is not violated.

Hourly chart

On this chart, we can see the wedge pattern which starts at 1275 more clearly, but the conclusion is the same: the price has gone too far inside the wedge to signal that significant weakness will take place when the lower wedge trend line is broken:

In addition to the wedge pattern, there are other signs that we are coming into a minor top. First of all, by going back to the 1180 base and re-studying the P&F chart, I concluded that the potential count is higher than I had originally thought. There is a valid phase count to ca. 1343, suggesting that there could be a pull-back after the SPX reaches that level. But since there are also potential higher counts, this is another reason to believe that 1343 will not bring about a significant reversal.

As a confirmation that 1343 could bring about a pause in the SPX, the QQQQ (which had a projection of 59.00)reached that target three days ago and has not been able to move above since.

The hourly indicators also tell me that we should expect some imminent weakness. A study of the A/D reveals that the sell signal will be triggered when the hourly reading falls below -1500. A close with that figure would also trigger a daily sell signal, providing that the SPX closes at 1330 or lower. A daily sell signal would indicate that the correction could last several days. Its extent will be determined by the top pattern when it has been completed.

A close below 1312 would also break the green trend line and signal that a short-term correction is under way.

The Dollar

Below are two charts of the UUP (dollar ETF). The daily chart (on the left), shows that after being pushed back by the 200-DMA, UUP found support near its former low and has been going sideways since. The indicators are correcting, but are still in an uptrend. The best guesstimate is that the index is forming a base before starting a sustained uptrend which, if it takes place, could have a significant effect on equity indices and some commodities. This would be the time to look for an intermediate top in the SPX.

On the hourly chart, the index has been retracing its steps for the past few days and may have found a low at a former support level on Friday. From here, it could at least bounce. A hint to that effect was given when it traded higher after the close.

Gold

The weekly chart of GLD gives us a picture of an index which is in a strong, long-term uptrend, but which may be ready for an intermediate correction. It’s too soon to tell for sure. It depends on whether or not the blue intermediate trend line is broken. On the daily chart, this would correspond to breaking the 200-DMA.

GLD reached its 139 projection and has been consolidating ever since. The distribution pattern carried a minimum count of 129, which was surpassed slightly before the index found support, and since then, it has rallied to itsshort-term P&F target of 135. Its next move is probably back into the base, but it’s doubtful if it will penetrate the strong blue trend line right away. More likely, it will expand that base and might even attempt to resume its uptrend.

If that trend line is broken right away, the next downside target will be 121, but the projections will have to be revised if more distribution takes place.

Conclusion:

For the time being, the long trend appears to be safe, and higher prices will probably occur before the SPX starts an intermediate retreat.

However, we currently have the best technical evidence yet since the rise from 1275 that, this time, the SPX is not crying wolf about forming a minor top at this level, and thatnear-term caution is warranted.

Andre