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
IS THE SELLING OVER (FOR NOW)?
Current Position of the Market
SPX: Very Long-term trend - Due to the recent market action, the odds have again shifted in favor of our being in a secular bear market which started in 2007. Whatever takes place over the next few weeks, the very-long-term cycles are down and will exert increasing downward pressure on prices. If they make their lows when expected, there will be another steep and prolonged decline into about 2014 (which may already have started).
SPX: Intermediate trend - There is a chance that the intermediate downtrend ended last Tuesday at 1101.54. Next week should clarify whether or not this is the case.
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.
During the first four days of last week, stock markets around the world underwent one of their most chaotic and volatile periods in history, but on Friday, an eerie calm prevailed as trading appeared to return to normal. Has the schizophrenic market behavior really normalized, or are we simply in the eye of the hurricane? This is what we are going to try and determine in this letter.
It appears that the bull run is over and that a bear market has started but, technically this won't be confirmed until the SPX drops below 1010.91 and makes a lower intermediate term low. It can take its time doing this -- and probably will.
Arguing that we are in a bear market is enhanced by a six-month period of distribution between the 1347 and the 1370 tops which, on the Point & Figure chart, yields a downside projection of 879, and even lower (789) if we include the left shoulder of the H&S formation.
The same P&F technique tells us that this low is not likely to be made in the next few weeks. The huge price swing which took place between Monday and Thursday of last week has created a base of at least 156 points across that would give us a rally projection to 1291- to which another 90 points could potentially be added -- for a target of 1381 and a new bull market high! Of course, this assumes that we do not make another low before we resume Thursday's rally of 68 points which tacked on another 6 points on Friday. If we do, it will most likely change the configuration of the base and modify the count. There is a good chance that we could make a new low. One interpretation of the Elliott wave structure allows for one more slightly lower low before we start a "real" rally!
Let's do the rest of our analysis with the help of the charts. It will be easier to follow.
We'll start with the Daily Chart.
The EW notation has been marked on the chart and the next few days should confirm the short-term structure of the SPX. We may have completed "4" on Friday, and are getting ready for "5" (which should take the market to a slight new low). Another possibility is that wave 4 could move a little higher before 5 gets underway. A third possibility - which is the most interesting - is that 4 and 5 do not materialize, and this would eliminate the previous 1-2-3, leaving us with A-B-C as a complete correction, to be followed by a potential move to a double-top or a new high.
This third alternative (which sounds far-fetched) is given some credibility by the amount of stock which changed hands during the four days of trading that occurred just above the 1101 level. In "the old days" this meant that stock was moving from weak hands to strong hands, but with the radical change in trading psychology which has taken place over the last few years, this theory may no longer be as valid as it was.
We'll have to wait until next week to see what the SPX decides to do. On Friday the indicators closed in a neutral state, just short of giving a buy signal, but one could come as early as Monday's close if we have a positive day. In order to do this, the index would have to close outside its red channel and move into the upper half of the green one.
The bottom (A/D) indicator is already well on its way, but the top one needs just a little more push, and the MACD (in the middle) requires much more work. In fact, this is the indicator that can throw cold water on the bullish scenario. A new intermediate uptrend does not usually start without this indicator showing some deceleration ahead of a low and, preferably some positive divergence as well.
I have described the most obvious structural alternatives. Others could reveal themselves as we move forward. Let's now take a look at the Hourly Chart to see if it adds anything to our perspective.
The index has already decisively broken out of its steepest green channel, but not out if its wider red one. That results in the same condition of uncertainty that we have in the daily chart. If it turns down before it moves out of it, there is a chance that we are going for a new low.
The indicators are in an uptrend, but overbought. They can stay overbought for a long period of time in a strong market, and on Thursday, the market showed a lot of strength, but will it last? More importantly, they are still above their trend lines and do not show any negative divergence. As long as these conditions remain in place, prices can still move higher.
I have not labeled the uptrend from the low, but there are several possibilities here also -- some more bullish than others. We need to wait until Monday to shed some light on the near-term trend.
There is a simple way to confirm the bullish theory: if we can move above the 200-hr MA (1253), and then the 200-DMA (1268), there is a good chance that the index is on its way to making a new high.
There are several cycles that are marked on the daily chart. There is a 3-yr cycle that was due to make its low in October. Unless it made its low early and was the cause of the recent decline, this will be another source of downward pressure on the market.
The 10-wk cycle, due in just about a week, is well-positioned to bring about the low of wave 5 (if there is one). And the 14-15 week (high-to-high) cycle would lead the market in a rally after the 10-wk cycle has made its low.
The kind of a low brought by the 10-wk cycle could be revealing, since the market will be pulled upward by the next cycle.
The Summation Index (courtesy of StockCharts.com) took a big hit during the market sell-off, declining below the July 2010 lows. Does that qualify as a confirmation that we are in a bear market? I don't think so. This technical rule only applies to the price index. On the other hand, if the NYSI can move back above its recent high, it should give the bulls some hope that all is not lost just yet!
The SentimenTrader (courtesy of same) continues to give us a positive reading. We'll see if it's enough to prevent another low from being made.
I don't know if the comparison is valid, but the last time the NDX:SPX ratio had that kind of a move was after the completion of the June-August 2010 intermediate correction period. Is it forecasting the same kind of action in the near future?
The VIX had a move which equaled its May 2010 surge. It has started to retrace, but has not quite given a sell signal. Nor has it shown positive divergence like it did when the SPX made its final low in July 2010. Positive divergence in the VIX appears to be the normal pattern. However, in 1998 it made its high as the market made its low. There are always exceptions to the rule!
The Dollar Index
This is a chart of UUP, the dollar ETF. It's difficult to know what it is currently doing. It may be building a base for a move out of its intermediate and long-term downtrends, but coming out of its red Intermediate channel had no follow-through. If it did make a new low, it would mean that the dollar could fall another three points to 71. If, on the other hand, it were to start a move up and rise above the 200-DMA, it would signal the beginning of a dollar move to 82. It would also probably ensure the continuation of the bear market in equities, except that it's reaction to last week's market turbulence was nil!
GLD is the gold ETF. It trades at roughly one tenth the price of gold. I keep a P&F chart on GLD which gives excellent projections. When it reached 155, GLD filled a phase count which promised to be followed by a significant correction. However, it only made a shallow consolidation and started up again. Taking the count across the re-accumulation level, it projected a move to 165. But the index kept going higher and I had to re-analyze the base pattern that it made at the 89 level to realize what it was doing. It had started to include another phase to the left of the original base pattern and to extend its potential count.
Although this looks like a blow-off move with exhaustion gaps et al, this could actually only bring about another short-term consolidation followed by a move to 180, and even 187-89. For the past two years, gold has moved in synch with equities, but gold accelerated upward when equities fell. If that trend continues, higher counts on gold do not bode well for the stock market. However, after it reaches 189, GLD is likely to enter into its best correction yet, which could give equities some breathing room.
OIL - USO
USO, one of the oil ETFs, charts well and counts well on the P&F chart. It does not have a bullish chart!
The high of 2008 was 119. During the bear market, USO fell to a low of 22.74 and only managed to retrace .236% of its decline to 42.19 during a two-year bull market, subsequently rolling over again and retracing 11 points before finding some support and meeting a short-term P&F projection of 30-31. In the process, it broke its long-term trend line from the February 2009 low.
What it does from here is not clear since there is currently no lower target that can be derived from the P&F chart. It may build a shelf at this level and, if we are truly in a bear market, eventually go lower.
Until proven otherwise, the SPX has probably begun a bear market decline. There are two possibilities that stand out:
1 -- Even if it makes a slightly lower low in the near future, it may remain above the general level of its 1102 low and mount a sizeable bear market rally before going lower.
2 -- Because of the behavior of certain indicators and the size of the base pattern established above the 1102 low, there is still a remote possibility that it has only completed a severe intermediate correction and will not start a true bear market until sometime in the early part of 2012.
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