Precision timing for all time frames through a 3-dimensional approach to technical
analysis: Cycles - Breadth - P&F and Fibonacci 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
Very Long-term trend - The very-long-term cycles are down and if they make their lows when expected, the bear market which started in October 2007 should continue until about 2014-2015.
SPX: Intermediate trend. The index is now challenging its intermediate downtrend and has closed outside of its downtrend line. The move could signal a new intermediate uptrend, or the continuation of an intermediate sideways consolidation.
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:
In the past two weeks, the SPX completed a base formation above the 1040 level and started a new shortterm uptrend which has the potential of carrying up to 1148 -- and even 1168 -- if the full Point & Figure base count and its extension is met.
As of Friday, there was no sign of deterioration in the uptrend. The index met a minimum phase projection at 1110 on Thursday, and has been consolidating since. The consolidation could end on Monday when a 39-td cycle makes its low. This phase has a potential extension to 1120-1125. If/when the index gets to that level, it will have to decide if it wants to end its uptrend and reverse, or continue beyond to meet the full base projection.
The longer-term picture is subject to several interpretations. The most probable one at this time is that the SPX has been moving in an extended sideways intermediate trend since it made its high at 1220. With the 4-year cycle (probably) still ahead of us, this trend could continue with another retracement into about mid- October when the current short-term uptrend reverses. After this retracement -- especially if it does not bring much weakness and the 1010 level holds -- we could start another up-leg in the bull market which began in March 2009.
If this scenario materializes, the bull market could then extend well into 2011.
Analysis
Chart Pattern and Momentum
We’ll start with the Daily Chart and follow with the Hourly Chart. They contain all the information that we need at this time to determine the market direction for the next few weeks.
Now that the index has made a low higher than the 1010 low in early July, we can draw a trend line connecting the two points, and by placing a parallel line at the 1129 top, we have created an established trend channel. Our P&F projection zone is at the top of that channel, and if the SPX makes it to that level, it will be a sign of strength. Since there is no weakness in the indicators outside of minor divergence in the A/D, there is a good chance that the index can reach at least the 1120-25 extended phase projection, and perhaps even the full base count of 1148-1168. After it has made its high and reverses, staying inside the black channel until mid-October would be another sign of strength.
The Hourly Chart shows that, after breaking out from its base, the SPX quickly rose to its first projection level of 1110. When a target is reached, it is normal for profit-taking to cause a pull-back. In this case, there was hardly any. This is a sign that traders are holding on to their positions because they are expecting prices to move higher.
Another sign of strength is that even with a 39-td cycle bottoming imminently, the price has continued to crawl up. This, in the face of divergence in the A/D and momentum indicators. In fact, price has kept moving up while the StochRSI has undergone a full correction -- a rare occurrence. The cycle is due to make its low on Monday and could provide some additional retracement, but in this position, the indicators are ready to flash a buy signal. It is logical to assume that this will take place as soon as the cycle has reversed, and this would allow the index to resume its uptrend to its next target of 1120-25.
What the SPX does after reaching that level will determine whether the rally ends, or continues to its full P&F base projection of 1148-68.
Larger ImageCycles
After the 39-td cycle bottoms on Monday, the 13-td cycle is due to make its low on 9/16. These small cycles can have a good impact on prices in a downtrend, but in an uptrend, their effect is often reduced to a oneday affair.
Beyond that there should be nothing of consequence until about 10/20. This is the time frame during which the 4-yr, the 9-mo and the 17-wk cycles should be nesting.
I mentioned earlier that it is possible that the 4-yr cycle bottomed in July along with the 2-yr cycle. If it has, this would considerably reduce the impact of that time frame on the market. How much retracement actually occurs will help us gauge the probable strength of the next bull market phase, but it is becoming increasingly clear that the probability of a "crash" is diminishing every day.
Projections
The following text and chart was sent to subscribers on Thursday. It is reproduced here because it demonstrates the value of Point & Figure projections. It is also pertinent to the analysis of the short-term trend. It would be better if I could have shown and actual P&F chart, but the one I use is updated by hand, and I have not figured out a simple way to get a good reproduction of it. And although P&F charts are available from StockCharts.com, their software does not seem capable of giving me the needed configurations. Fortunately, the hourly chart does a good job of showing you the projection targets and how they are established.
9/09 Commentary to subscribers:
The reason why the 1120-25 level is important is because it is the projection of the first phase and its extension. If the rally is going to fall short of the 1148 target, this is the most likely level where we should get a reversal. The base established above the 1040 level is not compact, but is made up of two distinct phases, and this makes at total base projection less reliable. Instead of taking into consideration the entire base, the rally may decide to end when the full potential of the first phase has been exhausted.
If the rally progresses beyond its minimum projection of 1110, it can still extend to 1120-25 because there are additional weak counts extending to the left of the mid-point decline from which to determine the next potential target, if the index decides to move higher. How these are calculated is shown on the chart above.
Breadth
The last newsletter stated: "The NYSE Summation index (courtesy of StockCharts.com) has shown an obvious reluctance to confirm the recent downtrend. This is a sign of internal strength." In fact, it turned out to be a precursor to a trend reversal. This is what it looks like this week:
The index found support on its 50-dma and turned up, confirming the short-term market reversal and uptrend. It will be important to keep a close watch of this indicator over the next two weeks to determine the internal strength of the market.
Also in the last newsletter: "The daily A/D indicators did not confirm the apparent market weakness in the decline from 1100. This non-confirmation of the recent weakness is a sign that the short-term trend, at least, could be reversed." This analysis also turned out to be prophetic. As of Friday, the daily indicators showed only a mild divergence, not enough to be of concern, yet.
Market Leaders and Sentiment
The SentimenTrader (courtesy of same) has moved to a neutral position and shows no real threat to the uptrend, so far.
The NDX/SPX ratio (courtesy of StockCharts.com) improved over the past two weeks. This is a positive for the market.
Gold
After continuing to recover from its late July low, GLD turned down just pennies from its former all-time high of 123.56. The indicators suggest that if this is not yet a short-term sell signal, it should be just a matter of time before it is. The short-term uptrend line has been penetrated, but not yet convincingly.
If it is giving a sell signal, the fact that it has already violated an intermediate trend line could make it vulnerable to re-testing the recent low of 113.08.
Summary
The SPX is in a well-established short-term uptrend which does not yet show signs of deterioration. Just above the 1040 level, it formed a base from which clear Point & Figure projections can be determined. 1120- 1125 is a level to watch for a potential reversal which could bring an end to the rally.
On Friday, the index closed above a down-trend line drawn from the 1220 top, ostensibly bringing the intermediate trend to an end. However, it is too early to determine the importance of this trend line break. A move beyond 1130 would confirm the start of an uptrend since it would give us a sequence of higher highs and higher lows. The odds of doing this are fairly good since the full base P&F count is 1148-1168.
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