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 secular bear market which started in October 2007 should continue until about 2014-2015.
Long-term trend - In March 2009, equity markets began a corrective move in the form of a mini bull market. Many signs point to a continuation of this trend into 2011 and the surpassing of the April 2010 intermediate top.
SPX: Intermediate trend. The SPX is ready for a short-term pause, after which it should resume its uptrend.
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 SPX may have reached a short-term top on Friday. If not, it is likely to do so on Monday. The Point & Figure base which was formed just above the 1040 low had a count to 1148, plus an extension to 1168. There was also a Fibonacci projection to 1175. Last Friday, the index made an intra-day high of 1167.73 before pulling back slightly at the close.
Besides reaching valid price projections -- an action which normally results in a trend reversal -- there are other factors which support an impending short-term peak for the SPX in this time frame.
- Its daily and hourly indicators both show negative divergence, a condition which normally leads to a reversal.
- It is making what appears to be an ending diagonal pattern which is either complete, or nearly so.
- It should encounter resistance created by the 5/13 top at 1173.57.
- The dollar index has reached its reversal point, and gold probably made a short-term top on Thursday.
- The 17-wk and 9-mo cycles should be ending their respective phases near October 18. This should pressure prices for the next couple of weeks.
When we analyze the charts, we will pin-point the price action which would confirm a turning point.
This impending reversal is not likely to put an end to the bull market which started in March 2009, or even to the intermediate trend which began in early July at 1011. The pull-back should find some good support between 1120 and 1130.
Analysis
Chart Pattern and Momentum
On the Daily Chart of the SPX (below), I have marked the price projections discussed in Overview. When the index reached its first projection of 1148, it had a brief pull-back, which was followed by a sideways pattern lasting a little over a week, before making a move toward the higher projections. The indicators reached their momentum peaks at the 1148 level and have not been able to regain it since. Weakness is particularly evident in the breadth oscillator; all it can do is crawl along the zero line.
The heavy green line is the long-term trend line which starts at the March 2009 low. When it is penetrated to the downside, this will signal the end of the bull market. As you can see, after the SPX reached 1219.80 at the end of April, it underwent an intermediate correction which ended at 1011, on 7/1. Since then, prices have been making a pattern of higher highs and higher lows, indicating a solid uptrend. The imminent pullback won't even come close to challenging this uptrend. Neither the weekly nor the monthly indicators (which are accelerating upward) give any indication that an important top is near.
Some analysts see a potential inverse head & shoulder pattern from May to September. If so, a pull-back to the neck line should be expected, and the intermediate move which is underway should continue beyond the 1219 top. I will make specific projections for the next top at the appropriate time, but for now, let's go to the Hourly Chart to refine the price projections, and to discuss what it would take to confirm a near-term reversal.
Very often, in the final stages of a trend, some re-accumulation or re-distribution levels are formed which confirm the original base count. This time is no exception. I have indicated on the chart the two levels where confirming patterns have formed. The counts range from 1170 to 1176. If there is a final thrust on Monday, these are the levels from which a reversal should be expected.
The hourly indicators are all showing negative divergence. If they turn down and break their trend lines, we should have the start of a reversal.
The index has moved in a channel which is defined by the brown trend lines. Just above the lower brown line, there is a green trend line which connects the 1041 low to the last pull-back at 1132. If that trend line is broken, in conjunction with a move below the red horizontal line at 1151, we should have a reversal The reversal should also break the brown channel line, and probably move through the lower line of the black channel as well.
When we do reverse, I am expecting the pull-back to end at some point between the two lower red horizontal lines. We'll refine the projection after we have made the top.
Cycles
The only cycles which concern us at this time are the 9-mo and the 17-wk cycles. They should both make their lows near 10/18.
Projections
The projections for the top of the rally have been discussed in detail and need not be reiterated.
Breadth
The NYSE Summation index (courtesy of StockCharts.com) has managed to rise above its former high. This is a sign that the intermediate trend is not in danger of ending. However, the RSI has made a second overbought top which is lower than the first. That constitutes negative divergence and tells us that a short-term peak in price is near.
The negative divergence that shows in the daily A/D oscillator is far worse!
Market Leaders and Sentiment
The SentimenTrader (courtesy of same) is only mildly negative and the position of the long-term indicator is not at a level which is indicative of a significant top.
Gold
Just as there is evidence that equity markets have reached a peak and are about to correct, there is also evidence that gold is ready to do the same. In the past week, GLD went parabolic, jumped outside of its rising channel, and formed an exhaustion gap, very much as it did in early December of last year -- except on a slightly smaller scale. It has also reached the highest possible P&F projection for this move. This has created a situation almost identical to that of early December 2009, and it would be logical to expect the same sequential move -- i.e. a price decline.
One small difference is that the upper indicator has not yet given a sell signal, and since the T projection calls for Monday to be the high, there could be one more attempt at continuing the rally before the decline begins. That would be consistent with SPX going for its final target on Monday.
Summary
Nothing about the stock market is written in stone. However, with such overwhelming technical evidence that the SPX is at a short-term peak, it would be unwise to ignore it.
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