A 3-dimensional approach to technical analysis
Cycles - Breadth - Price projections
"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.
Long-term trend - The Dow Jones Industrials may be deviating from their typical decennial pattern in an election year. Important cycles going into the Fall could be the reason for this, but one also has to consider the possibility that the downward pressure from the 120-yr cycle, which is due to make its low in 2012-2014 has begun to take effect and that October 2007 was the top of the bull market. This is not yet confirmed and remains a low probability.
SPX: Intermediate trend - It is possible that the intermediate term correction was completed at 1201. More likely, this is only a counter-trend rally which probably has a little farther to go.
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 determines the course of longer market trends.
Excerpts from the last Overview, 2 weeks ago:
Talks of a market crash directly ahead have been increasing recently... Will it happen? ... Whether or not we have climactic market action at this time is not as important as recognizing the signs which precede a reversal and, as we will see in the following sections, they abound...
Crude recovered from its sharp sell-off of mid-week and went on to make a new high on Friday. However, the chart pattern and momentum indicators suggest that this could be a final blow-off. Since the SPX and oil are trading in opposite directions, a reversal would probably coincide with a low in the SPX.
Since this was written, oil is down from his high of about 147 to a low of about 123, the Dow Industrials has had a rally of 870 points, and the SPX one of 90 points. Importantly, financial and bank stocks also broadly participated in the rally, but they were deeply oversold and ripe for a bounce. So was the rest of the market judging by sentiment indicators at the time of the low.
In the decline, the Dow industrials was one of the weakest indices, but it has had one of the best recovery rallies. The Dow Transportation index continues to be one of the strongest along with the Nasdaq 100, but the Russell 2000 continues to distinguish itself by being the only index which is already challenging its intermediate downtrend line.
What kind of a low have we made? Is this just an oversold rally, or the beginning of something much more important? If this is the bottoming of an important cycle, we should have a continuation of the uptrend. This is what we'll try to determine by examining the technical position of the market from several vantage points in the following sections.
Chart pattern and momentum:
When the oscillators at the bottom of the daily chart started to show positive divergence, it was time to start paying attention to a potential reversal. It came when trend lines were broken and the rise in prices was confirmed by positive breadth.
After a six-day rally which netted 90 points, the SPX met with some tough resistance at 1290 and, being short-term overbought, was in need of a consolidation. This occurred all at once in last Thursday's 30-point reversal, but there was no follow through Friday. Instead, the index spent the day consolidating in a narrow range.
The next couple of days should determine whether the rally or the decline will continue. There could be a little more consolidation at the current level, but note that there is no negative divergence in the indicators, and they don't show a pattern which normally corresponds to a short-term top. Therefore the odds favor an eventual continuation of the rally.
If this turns out to be an important low, the first challenge of the SPX will be to trade decisively above 1290. Doing so would re-establish a pattern of higher highs and higher lows and it would have to be supported by positive breadth. We would then be in an uptrend as long as this pattern continues.
Since it is important to put the short-term within the context of the intermediate and long term trends, let's take a look at the weekly chart.
The SPX has been in an intermediate decline since it peaked at 1576 on 10/07. The decline is outlined by red dashes and is moving in what appears to be an A-B-C correction of the 5-year bull market which started on 10/02. This correction has been confined to a less than 50% retracement of the entire uptrend and, so far, has to be regarded as a normal correction of the previous trend.
Some bullish divergence is appearing in the momentum indicators, suggesting that a low may be near, but the "C" wave does not look complete and there is a projection to a lower low which has yet to be filled. It does not have to be, but as long as we don't have a confirmed reversal, it has to be kept in mind.
A short-term cycle low is due either Monday or Tuesday. Of greater importance, we have been waiting for signs that the 2-yr cycle has made its low, and the recent reversal may indicate that it has. In which case the rally should extend for a while, especially since the daily indicators are calling for it. But there is at least one and perhaps two longer cycles which may not bottom until October which could still drive prices down to the projection zone shown above, and complete the "C" wave of the correction.
The preferred primary price target needed to end the intermediate corrective pattern is about 1180 or slightly lower. The index reversed at 1201 and could have made a final low, especially since the weekly indicators are showing positive divergence. But until the upper trend line of the down-channel has been broken, it is still in a downtrend and one would expect at least a test of the 1200 area to take place over the next couple of months before there is a resumption of the long-term uptrend.
Last Wednesday, a projection to 1290 for the rally was given to subscribers in an intra-day update: Yesterday's close put the S&P at the important 1278 level and within a short-term target which extends to about 1280. There was a little sell-off after the close, but this morning we have moved back in the range. The more likely action is to have some consolidation before trying for the next projection/resistance of about 1290 which is an even more significant resistance level.
Then on Thursday: The SPX has now broken its 1270 uptrend line and this is confirmed by the worst A/D figures since the low. The decline is a correction of the rally which started at 1201 and ended at 1291. The Point & Figure chart gives it a potential of reaching just above 1250. If we trade below 1249, we will trigger another target to about 1225.
Both projections were met perfectly and after touching 1251, the SPX spent a whole day of consolidating. This may be the low of the short-term correction from 1290, but if more weakness develops over the next couple of days, we could see 1225-30 before resuming the rally.
If/when the SPX manages to rise above 1290, its next target will depend on where it finishes its current consolidation, with a minimum projection of about 1310 and an upper target of about 1340. This will be refined as soon as 1290 is overcome.
Breadth was very poor in the decline and it pulled the McClellan Summation index to an extremely oversold condition. As you can see, it has not recovered very much in this rally (chart courtesy of StockCharts).
It will continue to move up as long as the McClellan index remains positive, but the picture that it conveys right now is that of an interim rally which has limited upside potential.
The daily A/D indicator on the chart above has not yet given a sell signal, suggesting that there will be an attempt at resuming the rally shortly.
Market Leaders and Sentiment
Intermediate-term, the NDX continues to be relatively stronger than the SPX. Short term, it is on a par with it. 46.00 on the QQQQ is an important level which corresponds to the important 1290 SPX level. If the former rises above 46.00 it should be a signal that the S&P will trade above 1290.
Sentiment indicators were very bullish at the bottom. They have now moved to a more neutral position, but are not yet bearish.
The 1201 low may turn out to be the low of the "C" wave of the correction from 1440, but this remains to be seen.
Since the daily indicators have not yet given a sell signal, it is likely that another attempt will be made to overcome the important 1290 resistance level.
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