Market Turning Points
for all time frames through a multi-dimensional approach
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 in their down phases, and if they make their lows when expected (after this bull market is over), there will be another steep decline into late 2014. However, the severe correction of 2007-2009 may have curtailed the full downward pressure potential of the 40-yr and 120-yr cycles.
Intermediate trend - SPX has started an intermediate correction from 1597 and is currently describing a corrective A-B-C pattern.
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.
SUCCESSFUL TEST OF HIGH?
The 1539 level has now been tested twice and held both times. If it is tested a third time it is unlikely that it will hold. After the first test, SPX went on to make a new high at 1597. The preferred scenario is that this represents an intermediate high which was followed by corrective wave A. Then came corrective wave B which went just about as far as the base count (from ca. 1445) would take it. After reaching that level on Thursday, the index appears to have now started wave C which should end the correction when it is complete. We should also note that if last week's high prevails, we will have started a pattern of lower low and lower high, typical of a correction. Roughly speaking, we can probably expect a 4% to 5% correction from the 1597 high.
Assuming that the secondary top was made at 1592.64 (a little shy of its ultimate count of 1596-1600), present P&F and Fibonacci projections for the low fall into the range of that expected correction. Of course, this is preliminary and it will refined when SPX has given a decisive sell signal by closing below 1573. Friday's action was typical of an index which has met its upside projection, bringing about the first wave of selling by the more sophisticated traders. A follow-through on Monday or Tuesday would be encouraging for the bears since it would confirm several technical and structural patterns that are now only possibilities.
The current cyclical configuration is also bearish. I have discussed the yearly cycle pattern which tends to make a high in April followed by a low in June or July. Historically, that pattern is clearly discernible on a weekly chart and, as we will see, there are signs that it has started to recur.
Even though I showed the weekly SPX chart (courtesy of QCharts) last week, I believe it is worth showing again as a reminder of what the market is facing over the short term. If you are a trader, much happens during the week that can distract you from the bigger picture and keeping an eye on the weekly chart can restore your overall perspective.
Nothing has changed over the past week to deter us from the idea that the SPX is creating the top which normally takes place in April. The rally from the 1539 support level, as strong as it was, did not have any positive effect on the indicators. The MACD showed some minor hesitation, but the SRSI continued on its downward trajectory. This is not expected to take place but, even if SPX were to reach its maximum count of 1600, the indicators would look even worse than they do now since they would exhibit strong negative divergence, and this would tell us that the advance would be short-lived.
As long as we are looking at this chart, let's use it to remind ourselves that what we expect is only an intermediate correction and not the top of the bull market which appears to have more to go both in time and price.
The next charts are also courtesy of QCharts. We started looking at these before we made the 1597 high, hoping that the leading tendency of the Russell 2000 would again manifest itself as we approached a reversal. It did not disappoint us as it made its high almost a month before SPX. And what is it telling us now? That it was still weaker than SPX at last week's top, making us comfortable in our forecast that the correction is not over. It's irrelevant that it has broken out of a short-term down-channel as long as it remains below its second peak, just as SPX remains below its first peak.
IMW is one level lower than SPX. It has already dropped to that which compares to 1480 in the latter, and if SPX breaks below 1539, IWM will most likely break its 88.50 level as well. Both indices are probably aiming for the vicinity of their 200 DMA and that could give us a clue about how much retracement we can expect from both. On the charts, I have suggested that both indices are making some form of H&S reversal pattern. If so, The one on IWM is already confirmed, while the one for SPX would be if the index dropped below its neckline/support level. Granted, these patterns look a little unorthodox!
The momentum indicators show us that the correction is not complete. The MACD is where the relative weakness of IWM really stands out. But the A/D indicators also show us how much strength remains in this market. Both probed deep into positive territory in support of the price rally.
In the next chart, (the 15m chart of the SPX) I have incorporated several technologies which corroborate one another and tell us that the current rally is probably over.
The bottom pattern was in the form of an inverse H&S which, on the P&F chart had formed a base which gave us 3 potential counts: 1589, 1596 and 1600 (a weak rally could also have opted to stop at the 1574 phase count). It looks as if SPX decided to peak just a little shy of 1596, a level substantiated by a Fibonacci projection.
The index appears to be making a H&S reversal pattern. This will be confirmed if it drops below the dashed neckline on Monday. Such a move would also put us outside the channel and below the second support line. 1574 is a count across the first small distribution top, and this is probably where the index is heading initially, in the vicinity of the 200-hr MA. If this is accomplished, then a small rally to the H&S neckline would be perfect because it would also correspond with a back-test of the channel line.
This analysis presupposes that the correction is in the form of a large ABC pattern for intermediate wave IV that could turn out to be an EW irregular, and that would work out well because wave II was a totally different formation.
I have already given subscribers the potential target for the correction. It will be refined when we have confirmation that the top is in place.
There are several cycles that lie ahead which should affect the market negatively. First, we have the yearly cycle discussed earlier which is expected to bottom in June. That should be the dominant cycle, ruling over all the others.
On Monday or Tuesday a minor cycle should bottom. Around May 1, a Kress intermediate cycle is due as well as a 29-day cycle.
The next 7-wk cycle low is due in the third week of May, and around June 2, the 29-wk cycle should bottom, perhaps coinciding with the bottoming of the yearly cycle to end the correction.
The McClellan Oscillator and Summation Index are shown below (courtesy of StockCharts.com).
The Oscillator had a marginal up-move which put it back in the positive zone. This caused the NYSI to turn up just as it was finding support on its 200-DMA. If the correction continues in earnest, the Summation index should soon turn back down and break below the MA. That would undoubtedly send it lower and confirm the market decline.
The SentimenTrader (Courtesy of same) could not be more neutral with both the short term and long term indicators almost exactly in the middle of their respective range. I would feel better about forecasting a decline if the long term one was in the red zone, but since everything else seems to point to a market retracement, I have to go with the majority; but I will keep in mind the neutral readings of this indicator and what it might mean for nature of the correction.
In a bull market such as the one we are in, there is a consistent pattern in the VIX which precedes corrections: the index starts to make a series of higher highs and higher lows which result in a rounding bottom. We saw this in March-April 2012 and again in October-November-December of the same year. Both of these occurred just before sizeable corrections in the market. It looks as if the same pattern started in March of this year and has continued throughout April.
This pattern is accompanied by positive divergence in the VIX as it approaches the beginning of the correction (also manifest in the present VIX action). Of course, this warning must follow through with continued higher highs and lows as the market corrects. Is VIX again forecasting a significant correction?
XLF (Financial SPDR)
In the past few weeks we have been looking for XLF to show some relative weakness to SPX, as this would alert us to a market correction. This started to happen several times, but each time the financial index came roaring back in sync with SPX. The past rally has even taken XLF to a new high while SPX made a lesser high. That is relative strength which could be forecasting higher prices in SPX. But if we look at the indicator, severe negative divergence is occurring which nullifies whatever appearance of strength there is in XLF since the indicator is forecasting an imminent correction. The indicator is reflecting the deceleration process taking place in the price which is less and less able to reach the top of the trend channel.
Should XLF fall below is previous short-term low, it will confirm a correction in SPX.
In spite of an overbought indicator, TLT has refused to correct. It has moved through its 200-DMA and is using it for support to consolidate its recent advance. If we look back, we can see that the same kind of pattern occurred during April-June of last year, after which it made a new high. Is this a manifestation of the yearly cycle we have been discussing, and is it about to replay the same pattern? Probably, since the P&F chart gives it a projection to 127 or a little higher. That would put it outside of its main corrective channel before it engages in another corrective move.
GLD (ETF for gold)
GLD has had a 12-point rally from its low of 131. Does that mean that the correction is over? I don't think so! The weekly indicators are not suggesting this at all. In fact, in order to generate positive divergence in the weekly MACD, GLD would have to make a new, perhaps by the first of June, when its next 25-wk low is due. 127 looks like a pretty good target after this wave 4 correction is over.
UUP (dollar ETF)
UUP may be close to completing its consolidation and resuming its uptrend. At least, this is what the indicator is suggesting, and this also goes along with the P&F chart count which gives it a target of 23.30. A resumption of the dollar's uptrend would be another good reason for GLD (and oil) to continue correcting.
USO (United States Oil Fund)
The forces which caused a sharp rally in gold also had an effect on oil. USO used a previous short-term low to find support and rallied quickly from that level. Like gold, the decline is probably not over and it should resume shortly. The P&F target of 29 is still reachable, but it is not likely that the triangle projection of about 27.60 will be realized.
SPX has probably completed wave B of the corrective pattern which started from 1597 and is now starting wave C. If last week's high prevails, we would now have the beginning of a lower low lower high declining pattern on an intermediate scale.
Of course, we will need confirmation and this could come next week if the cyclical rhythm is unimpeded. The decline could then continue into early June and mark the completion of wave C.
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