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 - Down! The very-long-term cycles have taken over and if they make their lows when expected, the bear market which started in October 2007 should continue until 2012-2014. This would imply that much lower prices lie ahead.
SPX: Intermediate trend -The counter-trend rally which started on March 6 is still up, but losing momentum. Red flags are appearing in the A/D and the sentiment indicator. These are signals that normally precede a reversal.
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.
Overview:
The bear market secondary reaction is still intact, but it is losing momentum. A sideways consolidation in the SPX started on May 11 and lasted about two and a half weeks. After breaking out to a slightly higher level, the index quickly went back into another sideway pattern and closed on Friday only 16 points higher than where it was a month ago.
There are now red flags appearing in several indicators which should lead to another pull-back or even to a full-fledged reversal. These red flags warn that each rally is now being met by more and more sellers, and the SPX will soon be in a position to challenge its uptrend line, as you will see on the charts, later.
So far, the pull-backs have been gentle, coming in the form of shallow consolidations. At some point, one will turn into the beginning of a downtrend. The SPX has been traveling in a well-defined channel, so it should not be too difficult to identify when the trend has shifted. On Friday, it came very close to its uptrend line from the March low. There is a good chance that it will be broken next week, which would be more serious!
Longer-term cycles favor a continuation of the uptrend into July, with the Bradley date of July 15 as a good target for a final high. How much higher? We will be better able to estimate this after the coming correction.
There are still many Elliott Wave analysts who think that this uptrend from March represents wave 4 of the decline which started in October 2007, and when we turn down, we should be going for new lows. With investor psychology having shifted more and more to the bullish side, it is becoming more difficult to conceive. But if this is still a bear market -- which I am convinced it is -- we have to make new lows! So, be prepared when this trend turns down decisively.
What's ahead?
Chart Pattern and Momentum
We'll take a look at all the time frames to get a complete perspective of the current position of the SPX.
The Weekly chart shows that the index is trying to come out of its secondary channel. Considering the deceleration taking place (and better seen on the next charts) it's unlikely that it will be a meaningful endeavor, even if it succeeds. As you can see, it is pulling away from the top of its channel and could break its uptrend line at any time.
The top indicator is still overbought and inside its up-channel. The bottom indicator has begun to show the slightest sign of deceleration. This is why it has a very small red rectangle above it. The overall picture is that the greater momentum part of the move is over and that, as more and more sellers materialize, the index will become more and more vulnerable to a reversal. This is also better seen in the following charts.
Until proven otherwise, the EW count remains the same. We are looking for the top of wave 4 and the beginning of 5.
The daily chart (below) shows why the index is having trouble moving higher. It is up against the 200-day MA, the top trend line of the down-channel, and a former top in early January. It is too extended from the March low to be able to successfully challenge all these resistance levels, and some selling is beginning to appear. This shows up best in the indicator below which is made up of A/D data. The indicator has already turned down and given a sell signal (dashed red line). Price remains up, but it's probably only a matter of time before it follows the indicator. The fact that we have some short-term cycles bottoming directly ahead is going to make matters worse for the bulls.
For a full-fledged reversal, prices would have to move below all the moving averages and the lower (blue) trend channel line. However, the green trend line which reaches back to the March low should be easier prey for the bears; it is only a few points below Friday's low.
The Hourly chart is next. On this chart, I have marked "start" and "top". I am a little more certain of the start than I am of the top, but we'll come to that later. First of all, let's talk about the structure. I am assuming that it is a 5-wave pattern. Wave 3 broke out of the former consolidation and triggered a projection to 956-960. Wave 4 took the form of a triangle, and wave 5 reached 956.23 before reversing with negative divergence showing up in the shorter time frames, but not in the hourly chart.
Friday's action made it clear that the pattern was complete when the price deteriorated further, especially in the NDX which undercut its former low. But after the early morning weakness, prices stabilized, and both indices began to move up, struggling at first, but picking up a little momentum by the close which was at the high of the day for both.
There could be follow through on Monday morning. There is no negative divergence for Friday's bounce from its low and we could just as well open up as down based on this alone. Also, I had hoped that we would have a 5-wave pattern developing from the top to cinch the reversal, but it turned out to be only 3 waves. So I am not sure what to expect of Monday's opening. Everything points to lower prices in the next week, but there could be a last attempt by the bulls to hold them up a little longer.
Cycles
There are 3 cycles shown on the daily chart: the 8-wk, the 5-wk, and the 6-wk. If they have enough of an impact, they should keep prices under pressure until close to the end of the month.
The 20-wk cycle is due to bottom on July 28, and could play a significant role in ending the rally from March.
Projections:
I have marked two horizontal pink lines on the hourly chart. One is at 914 and the other at 909. If the SPX does not make a new high, these projections should work out as the first targets of the pull-back. If it does, we'll have to establish new ones.
Breadth
The NYSI has not budged much in the past several weeks, and it is still overbought. The oscillator under the daily chart gives us a better reading of what is happening with the intermediate A/D. It is deteriorating and seems ready to deteriorate some more.
Market Leaders and Sentiment
The longer term sentiment (courtesy Sentimentrader) is giving us a reading which occurs at important tops thereby confirming the warning of the breadth indicator.
The short term reading is at neutral, pretty much reflecting the position of the hourly indicators which are saying that the market may not be quite ready to head lower.
Keeping track of the relative strength between the NDX and SPX is another way to anticipate market turns. Historically, the NDX leads the SPX, and this is why it is valuable to keep track of what the next indicator (courtesy of StockCharts) is telling us.
You can see that it anticipated the March low by several weeks and is now making a topping formation with negative divergence in its lower indicator, while the top one is overbought.
The financial index peaked on May 11 and has not been able to overcome that level, since.
Summary
There is increasing evidence that the SPX and other indices are having difficulty sustaining their uptrend. This is very visible in A/D indicators which are showing negative divergence. Sentiment is also at a level consistent with important tops.
However, the SPX is still in an uptrend as long as it remains above its trend line and within the confines of its channel.
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