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 2014. This would imply that lower prices lie ahead. As illustrated by the current market performance, this will not be a straight-down decline, but will consist of a series of intermediate-term rallies and declines until we have reached the low point.
SPX: Intermediate trend. The SPX reached its 1130-35 projection on 12/28 and had a sharp sell-off at the close of 12/31. This is a reversal which is more likely to be of short-term nature than of intermediate proportion, but could develop into one over the next few weeks.
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.
The Summary of the last newsletter, two weeks ago, read as follows: "We may be about to start the last small thrust to a new high and reach the 1130-1135 SPX target that will mark the end of the rally which started in March 2009 at 667."
On the Friday that this was written (12/18), the SPX had closed at 1103.15. On the following Monday, the index started another upside phase which took it to 1130.38 where it made a small double-top on 12/24-12/28, and started a small correction which took it to its short-term channel line.
On Thursday 12/31, the SPX attempted an early rally which failed, broke outside its channel line where it held for a few hours, and then sold off sharply at the close.
The projection of 1130-35 was intended to target the end of the move which started at 1093.88 and could also have served as a target for the entire bear market rally, which began at 667 in March. For certain, we have completed the phase from 1093.88, and begun a correction of that phase. It is far less certain that we have ended the bear market rally from 667. Once again, key pieces are missing.
This newsletter will endeavor to determine what kind of a reversal was started last Thursday, and how much of a pullback we can expect.
Chart Pattern and Momentum
The weekly chart shows the SPX struggling to overcome long-term trend and channel lines. For the past few weeks, the index has moved into a bearish wedge pattern which, based on Thursday's action, appears to be complete and seems intent on resolving itself on the downside.
The green lines denote an intermediate trend channel during which the SPX has remained in the upper portion of the channel. If there is some follow-through to Thursday's sell-off, it is likely that it will move back down to the bottom of the congestion level (red line) and perhaps a little beyond the mid-channel green line, to the bottom of the black channel. If it does and rebounds from there, it will still be in an intermediate uptrend, still trading in the upper portion of its channel, and probably ready to make a new and final high before coming out of its green intermediate channel completely.
This scenario -- or a similar pattern -- which I consider the most likely, is something to watch for in the near future.
Let's look at the Daily Chart. The same channels discussed in the Weekly Chart analysis can also be seen here. I have added a potential projection for the correction getting underway. While the indicators appear to have given a sell signal, two of the three did so without first creating divergence at their tops, and although after hours, the index continued to sell off and closed right on its trend line, it is not yet broken! Probably minor concerns, but every reversal needs confirmation, and we won't have one unless the market trades lower on Monday.
Assuming that it does, note that the trend line serves a double function. It is also the lower channel line of the channel which ends up at "C". If 1130 is not the final top, it could be followed by one more up channel to the final destination which will be determined after another short-term correction.
Let's move on to the Hourly Chart for further scrutiny. This micro-analysis will greatly clarify the potential market position.
There are 3 levels indicated on that chart: 1103, 1063 and 1029. If the correction stops at 1103 and we resume the uptrend, we have a market that still wants to go to 1035 or even a little higher. If we drop to 1063 before turning, we could still move higher into 3/1(a Bradley date) before rolling over for good!
If we are starting a decline which takes prices below 1029, we are at the beginning of an intermediate-term trend which will take the market lower for most of the year in conjunction with the 4-year cycle bottoming phase.
The 4-year cycle is topping and should pull the market down for most of 2010.
As a result of the 12/31 market action, I am assuming that the 1130-35 projection has been reached and that we have started at least a short-term correction. Potential targets are given above, on the hourly chart.
From the last posting: The NYSE Summation index (courtesy of StockCharts) is no longer oversold and is in fact approaching overbought on its RSI. A final rally in the SPX to its projection target would cause it to become overbought with severe negative divergence -- just what we need for a top.
We got our wish: a new high in the SPX with an overbought RSI and strong negative divergence in the Summation index -- the ideal condition for a topping formation.
Market Leaders and Sentiment
Looking at the sentiment indicator (courtesy SentimenTrader), these are not readings of an important top, but rather of a short-term top of short duration. This suggests that more topping action will be required.
The SPX met my 1030-35 target which I thought could mark the high of the rally from 667. But the sentiment indicator (shown above) tells us that more work could be required before we have a high of intermediate proportion.
However, with the target met and the market's closing action on 12/31, it is likely that we have reached a short-term top and that there will be some additional consolidation before making another attempt at moving higher.
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