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
SPX: Very Long-term trend - The very-long-term cycles are down and, if they make their lows when expected, there will be another steep and prolonged decline into 2014-16.
SPX: Long-term trend - The probability that the bull market which started in March 2009 may have ended when the SPX reached 1370 on 5/02/11, is very low.
SPX: Intermediate trend - The index is most likely still in a triangle consolidation pattern which started with the February top.
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.
Market Overview
The rally which started last Monday at 1296 was not able to generate enough momentum in the weekly and daily indicators to confirm that an important uptrend had started. I had voiced my concern about the weekly indicators before, and in the last newsletter, in reviewing the weekly chart, I stated that "Neither the MSO nor the MACD has given a confirmed buy to the uptrend which started at 1265."
By the end of the week, the daily indicators - especially the breadth indicators - were giving a non-confirmation of the uptrend with some very visible negative divergence appearing in all time frames.
My Thursday Market Summary stated the following:
"With the kind of weakness which is beginning to show in the weekly and daily indicators, there is no guarantee that the various projections will be reached, and we should be very cautious when a projection is reached and we start reversing in earnest, especially after we break trend lines (any trend line)."
The base pattern that was created on the Point & Figure chart around the 1296 low gave a potential count to 1402, which was divided in various phase projections. The phase projection that the SPX was trying to attain on Thursday and Friday was about 1353. After reaching 1347, it could go no further and started to trade sideways. By the end of the day, on Friday, it started to trade outside its trend line. Strength in the QQQ, which made a new bull market high on Friday, suggested that the SPX might follow, since QQQ has a strong tendency to lead. It did not!
In the afternoon, the announcement that the budget talks had come to an impasse is not likely to be received very well by the financial markets, and the second phase of the rally from 1265 which started at 1296 has undoubtedly come to an end. This could be averted if some renewed hope for a deal emerges over the week-end, but since the indicators are calling for a correction, what happens may only be a matter of degree.
Where does that leave us? One of my assessments was that we had been in an intermediate correction since the February high which was taking the form of a diagonal triangle. I thought that it had ended with the 1296 low. It is now likely that it has not and my current diagnosis is that the index is now in the process of completing the triangle pattern. I have reasons to believe that the bull market has not yet come to an end.
Chart Analysis
Below, once again, is our panel of the three SPX time frame charts.
Scanning through all the charts, the first thing that is apparent is that nearly all indicators are showing negative divergence. We know that while negative divergence is not a sell signal, more often than not it leads to one, and this should get our attention. In this case, since all time frames are involved, one should be particularly cautious about expecting the SPX to go higher in the near term.
The Weekly Chart could be tracing out a diagonal triangle pattern with the "E" wave currently in play. If so, the "E" wave may complete with the next short-term downtrend, or it could, itself, take the form of a smaller triangle. It's probably not critical for the green uptrend line to remain intact, but the one which connects "A" and "C" cannot be broken. If it is, the triangle pattern is no longer viable.
If 1250 were to be exceeded on the downside, one would have to consider the possibility that a major high had been made at 1370, and that the top pattern was in the form of a large H&S.
The Daily Chart cannot be said to be bearish yet, but Friday's price range remained under Thursday's, signaling a potential consolidation in the trend. As long as the index remains above its moving averages, it's still positive. Even if it pulled-back, there are three trend lines and the 200-DMA below which should give it some support. If all these were to be broken, it is likely that the 1250 level would follow and an important decline would materialize.
Considering the indicators, the top one is finding resistance against a downtrend line and could be ready to turn down. The middle one is neutral for now.
The bottom one is the one that became negative on Friday by turning down against the price which had closed slightly up for the day. Already, the indicator had dropped very low in the previous decline, matching the former low of mid-June, and it never did pick-up enough upside momentum to match the price move in the current uptrend.
All in all, this chart is not that negative but, by including in the total picture the other two time frames where the negativity is more obvious, it gives a hint of which direction the daily index is likely to go next.
It looks as if the Hourly Chart ran out of steam on Friday. After dipping down in the first hour, the index started to recover, but could not quite make a new high, and the entire day's action left the indicators in a very weak position. In the last two hours, SPX started to trade outside of its trend line, but did not sell off. The strength in the QQQ kept it from doing so.
Point & figure projections
I mentioned above that the base that was formed on the P&F chart during the 1296 low had a total projection of 1402. Like all P&F congestion areas it was divided in phases, with 1353 being the count of the most important phase. Since there had only been sideways moves after each of the previous targets had been reached, I thought that we might get a good pull-back from 1253.
The SPX did not quite make it to 1353 and, based on Friday's action and the news of the budget no-deal, it may experience a pretty steep correction. Assuming that we sell off on Monday morning, the pattern created over the past two days of trading will turn out to have been distribution, and that gives us a potential move down to 1323-1320. Since the market is currently primarily motivated by the news from Washington, what happens next will probably depend on that and/or the next pattern that is formed on the chart.
As long as the total base projection is not invalidated by future market action, any subsequent pattern will probably confirm the 1402 target.
Cycles
The 9-mo cycle made its low precisely where it was forecasted, and was in part responsible for the rally that ensued.
A 13-wk cycle low is due on 8/21, followed by a 14-15-wk high around 9/11.
The next important cycle after that will be the 3-yr cycle which is scheduled to bottom in October.
Breadth
The NYSE Summation Index (courtesy of StockCharts.com) has not kept up with the rally. This is the same lack of momentum in the A/D that was reflected in the daily chart oscillator, and it is a negative.
Sentiment
The long-term index of the SentimenTrader (courtesy of same) has grown more positive over the past two weeks, and this inclines me to believe that whatever correction we may experience in the next few days will not be substantial and will be followed by a resumption of the uptrend.
The following index (courtesy of StockCharts.com) is also positive. On Friday, the NDX made a new bull market high while the SPX did not - by a long shot! Historically, this is not the way that bull markets come to an end and, since what this indicator is signaling is substantiated by the one above, expecting a major top right now just does not figure.
Summary
The news from Washington on Friday could roil the markets on Monday if something more positive does not emerge before the week-end.
Technically, this would end the current rally, and revive the idea that a potential diagonal triangle consolidation starting in February still needs to conclude its "E" wave.
Considering the two bullish sentiment indicators directly above, it would be fighting the odds to expect that a major top is already in place
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