Precision timing for all time frames through a multi-dimensional approach to technical
analysis: Cycles - Breadth - P&F and Fibonacci price projections
and occasional Elliott Wave analysis
"By the Law of Periodical Repetition, everything which has happened once must happen again, and again, and again -- and not capriciously, but at regular periods, and each thing in its own period, not another's, and each obeying its own law... The same Nature which delights in periodical repetition in the sky is the Nature which orders the affairs of the earth. Let us not underrate the value of that hint." ~ Mark Twain
Current Position of the Market
SPX: Very Long-term trend - The very-long-term cycles are down and, if they make their lows when expected (after this bull market is over) there will be another steep and prolonged decline into late 2014. It is probable, however, that the severe correction of 2007-2009 will have curtailed the full downward pressure potential of the 120-yr cycle.
Intermediate trend - It is probable that the intermediate correction ended at 1398 and that a new uptrend is in progress which could carry a little further after a correction.
Analysis of the short-term trend is done on a daily basis with the help of hourly charts. It is an important adjunct to the analysis of daily and weekly charts which discusses the course of longer market trends.
SHORT-TERM MARKET TOP IN PLACE
IN-DEPTH REVIEW OF GOLD
Market Overview
Last week, the long-awaited correction finally gained a foot-hold and drove the SPX down about 30 points from its 1530 high. In the last letter, I had suggested that it could reach 1532-1535 before turning down. That projection was in the ball park. Incidentally, since P&F projections are an essential part of my market analysis, from this point on, specific projections of future moves in the SPX will be reserved for subscribers.
After finding support at 1497, by the end of the week SPX had retraced 50% of its decline. 1495 is a strong support level. Does the fact that prices held there last week suggest that the correction is already over? Perhaps but, at the very least, SPX will have to test that area once again, and if that test is successful and the index rises above 1515, the odds will dramatically increase that a new high is in the making. Dropping below 1495 should extend the correction significantly.
We are in the time frame when the 36-wk cycle is due. So, has it already bottomed? In which case, there is a good chance that after a little more base building above 1495 there should be an attempt at making a new high. If it has not yet bottomed, the correction could extend for a few more days until it does, possibly sending prices lower. Or did the cycle invert and a much larger correction should be expected? We'll have to wait a few more days to know the answer to those questions.
Similarly, EW aficionados are trying to decide if we are in a wave 4 correction from 1343 with wave 5 and a new high to come when it is complete, or if SPX has just completed a major wedge pattern from 1075, and is ready to have a major correction. Like cycle analysts, EW analysts can often only make an educated guess about what lies ahead, and must wait for the market to prove their hypothesis. This is why both of these methodologies require assistance from technical tools to better evaluate the market position.
Here is what we think we know! The thirty-point decline from 1530 was probably wave "a" of the correction and, by Friday's close, it looks as if wave "b" was also completed at 1515. Some key indicators suggest that the market has more work to do before it can move higher, and we must now wait to see if 1495 holds over the next few days. If we do break below, there is a clear projection to ...J. Since the "a" wave was impulsive, there is a good chance that wave "c" will be also, making the whole corrective pattern a zigzag.
Chart Analysis
On the left, we have the Russell 2000; on the right, SPX (both charts courtesy of QCharts). We are looking to see if some relative weakness has developed in the Russell, but there is still no significant difference between the two indices. If anything, the Russell looks a tad stronger because it did not decline as close to its support level as the SPX did. The price channels vary in width, but that is probably not relevant. The rebounds of both indices look about equal, with SPX perhaps reaching a little higher than Russell. If Russell generally leads, it is therefore not suggesting that a final high is in place at this time.
The two bottom indicators have given a clear sell signal and do not look ready for a buy signal. That intimates that more consolidation above or below 1495 is needed before they are in a position to give one.
The MACD made a higher high along with price and only minor divergence appeared toward the end of the run. The top of the move normally comes when the MACD shows more pronounced negative divergence. This is clearly not the case, and it puts the odds in favor of the EW analysts who believe that this is a wave 4 correction with a wave 5 (from 1343) coming afterwards.
The SPX hourly chart gives us important details about the price movement. At the top, strong negative divergence in both indicators warned that a top was imminent. The break of both MAs, the trend line, and the 1415 level-- which had become a significant support level, confirmed that a correction was underway. There was a bearish engulfing candle at the top of the move which also shows up on the daily chart. The decline came in a fairly clear 5-wave pattern, which is the way important corrections begin.
After a quick sell off of a few hours, price began to decelerate noticeably as it approached the 1495 support level. Just above that level was the 200hr-MA which also normally provides support when first tested. In a show of strength, the SPX had been hugging the top of its channel from 1343 and with all the support which existed at mid-channel, it is no wonder that it was ready for a near-term reversal -- especially after completing an impulse wave.
If, on Monday, SPX continues to move up with good support from the A/D, it would become much more probable that the correction has already ended. However, the odds are against it for a number of reasons: a target to 1515 was reached at the close; the index is up against overhead resistance; in a correction, an impulse wave does not stand on its own and is part of a larger pattern; the hourly indicators have not given a buy signal and, as mentioned earlier, nor have the daily indicators. After an extended uptrend and after reaching such an overbought level, the 4th wave normally needs more of a correction, and the rebound from 1497 is probably the "b" wave of an a-b-c correction.
All the reasons given do not assure us that the correction will extend below 1495, but they make another test of that level extremely probable.
Cycles
A 7-wk cycle was most likely responsible for the decline to 1497 and for the rebound.
Unless it has inverted, the 36-wk cycle may be in the process of bottoming. The length and depth of the correction is dependent on which it is.
Breadth
The McClellan Oscillator and Summation Index (courtesy of StockCharts.com) are posted below.
Last time, I mentioned that NYMO was going to sit it out and wait for SPX to be finished. This is what happened and now, the McClellan oscillator has gone negative for the first time in two months and rolled over the NYSI in the process. With the latter making a new high along with SPX, it's not likely that this is going to be a very deep pull-back nor that we have seen a high in the SPX. The Summation Index RSI has already corrected to mid-range and will probably continue a little lower before the correction is over. When it reaches 30-40, it may be time to look for a reversal.
Sentiment Indicators
The SentimenTrader (courtesy of same) already shows a little positive change from last week. It never became very negative to begin with, and now, it is becoming even more positive -- though still essential neutral. This is another good reason to expect only a mild pull-back in the market correction.
VIX
The volatility index has finally gotten off the floor where it has been residing for about a month.
It is making a valiant effort at starting an uptrend but, although it has overcome a former near-term high, it's 200-DMA is just above the current price and will constrain its efforts.
The P&F chart gives it the potential to reach 17.50-18.00 before it runs into trouble. Since that would coincide with the level of the MA, it looks like a reasonable target.
XLF (Financial SPDR)
Like the Russell 2000, XLF is keeping up with SPY (green, below). This does not look like a market that is making a very important high. When these two indices -- and a few more -- begin to underperform SPX, it will be time to exert more caution.
BONDS
TLT is still building a little base which should give it a potential for a 4 or 5-point rally when it breaks its downtrend line and touches 118.
GLD (ETF for gold)
GLD has taken a dive in the last few days. Does it have much farther to go? Hopefully not -- at least not for a while. When it rallied to 174 in October of last year, I pointed out that it had arrived at a significant resistance level which could stop its efforts at resuming the long-term uptrend. On the chart, I also drew a number of support levels which could contain the following correction, all the way down to the extremely important 149-150 level. GLD found temporary support at, but subsequently broke, every single one of these support levels and has now arrived at the critical one where it must stop if the pattern it has been making since its high of 185 is to contain the low of its correction.
Frankly, from a purely technical point of view, the odds of holding at 149 are not very good. The major uptrend from 68.81 took it close to the projection target of 187 that had been determined by the P&F re-accumulation pattern that had formed between 68 and 88, in the shape of an inverted H&S. A Fibonacci measurement to 183 also concurred that this would be the extent of the move which started in October 2008 and lasted three years.
The correction from the high of 185 has, so far, retraced a little over 30% of its uptrend. A retracement of 38.2% would take it down to about 141 - 50%, down to about 127. The major uptrend in Gold started around 2001 and it appears (by looking at the long-term chart which you can find on www.InvestmentTools.com) that the move which ended at GLD 185 was the third wave from the low. That would make the current correction wave 4, and when wave 5 starts, according the P&F chart, GLD could reach 233. But it's likely that wave 4 will not be complete until it retraces at least 38.2%, down to about 141.
In fact, the top formation, when viewed on a P&F chart, has two valid counts: one to 143, and another to 134. Since some confirming counts to 134 appear to be forming along the way of the correction, it may be prudent not to expect a major reversal to take place until the 50% retracement target has been reached.
UUP (dollar ETF)
UUP continues to profit from the weakness of the euro and is now challenging an important level where a former short-term top coincides with its 200-DMA. That should "give it pause". If it does eventually break above, it has already formed a P&F base which could take it up to 23.50.
USO (United States Oil Fund)
USO met with the resistance noted on the chart and was pushed back. Its recent decline has closed a gap and, in the process, it is back-testing its broken downtrend line. This should provide some support and start a consolidation process, especially since USO has also reached its 200-DMA, and there is another support level immediately below. If, after a short consolidation, it should continue its decline, it might be resuming its long-term downtrend and going for the 28 projection target that was mentioned earlier.
Summary
SPX fell a little short of its assigned target of 1532, and called the uptrend quits at 1530 -- probably only temporarily, since it appears to be making a wave 4 correction when you start counting from the 1343 low. It most likely needs more of a pull-back before wave 5. The question is whether it will continue to consolidate above the 1495 support level, or if it will break it and extend the decline significantly before ending its correction.
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