Precision timing for all time frames through a multi-dimensional approach to technical
analysis: Cycles - Breadth - P&F and Fibonacci price projections
and occasional Elliott Wave analysis
"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 (after this bull market is over) there will be another steep and prolonged decline into late 2014. It is probable, however, that the steep correction of 2007-2009 will have curtailed the full downward pressure potential of the 120-yr cycle.
SPX: Intermediate trend - The Fed has extended the SPX intermediate uptrend, but for how long?
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
"Buy on the rumor, sell on the news!" The first part of that strategy would have worked well. The rumor that the Fed would implement QE3 has been around for a long time, when prices were much lower than where they are today, and it sustained the rally until the fact. Now, let's see if the second part of that statement will also prove to be a winner.
As you know, based on the cyclic configuration, I have been calling for a cycle-generated top in August and if not, in September. There is no question that the expectation that the Fed was going to implement some form of QE3, and then the actual implementation of that policy was a major force that kept the SPX and other equity indices in an uptrend in spite of the downward pressure that "should" have been created by cycles at the tops of their phases. The question now becomes: will the stock market return to its normal cyclical behavior pattern? The answer is: it should!
Already there are some signs that the internals were not all that they could have been in last week's surge. We'll see some examples of that when we look at the charts. What we can say, however, is that this move by the Fed may have strengthened the probability of extending the bull market into 2013, and that an important decline which could have put an earlier end to the bull market may been averted. Nevertheless, if the cyclic pattern does return to normal, it could still bring about an intermediate decline into early January - primarily due to the 66-wk cycle which has triggered a significant correction ever since the beginning of the bull market.
For this to happen, the next week or so will have to give us some clear indications that a top is being created in this area. As mentioned above, some favorable signs are already appearing and these will be discussed in the following charts.
Chart analysis
This Daily Chart shows the SPX concluding a sharp decline down to 1075, forming a base, and starting an uptrend which ended at 1422. It then had another decline to 1267, formed a smaller base and, so far, has risen to 1474.51 where it could make a top for a number of reasons, e.g. cycles and P&F projections.
All intermediate tops have some things in common, so let's see if what we are doing compares to the top which formed at 1422. The short answer is: not yet! The last top underwent a period of deceleration in the form of a small triple top followed by the breaking of a minor support level, holding on its intermediate trend line and attempting to resume the uptrend, which ended in failure. Then, it was finally ready to break its major trend line, break more important support, and start a downtrend.
Both indicators gave important warnings when negative divergences appeared before the top was reached, followed by the breaking of important indicator trend lines and support levels.
It's unlikely we'll create the same pattern in today's market, but some of the basics should be evident. For instance, because of the circumstances involved, we may have a "blow-off" top instead of one which decelerates gradually, so a reversal may come soon after we make our final high of the move. Whatever form it takes, we will eventually have to break trend lines and levels before we can have a legit reversal, and this normally takes place in the indicators first.
We have already reached an important phase projection at 1364-66 but we should be mindful that there are higher potential targets which could still be reached. We have also risen to the top of several channels and channel parallels, and should expect some resistance. Furthermore, the momentum indicators are overbought on all time frames, and a retracement to correct this condition is likely.
On a short-term basis, there are early signs of negative divergence forming in the daily momentum indicators and in the raw breadth figures. This divergence is also clearly manifest in the McClellan oscillator. At the July top, it reached 100. Today, even with a new price high of 40+ points, it is only at 60. However, these are early signs which should develop into something more substantive before we can take them seriously.
Let's see if they show up more clearly on the Hourly Chart.
What shows up best on this chart are the trend lines that are likely cause some resistance, and if they cause a loss of upside momentum with even the slightest pull-back, it will affect the indicators; perhaps giving us the first signs of a reversal. In fact, negative divergence is already present in the most important indicator, the A/D (red asterisk).
The next thing that should take place in the reversal sequence is the breaking of the indicator trend line in conjunction with the steepest price trend line including the minor support level above 1430. This should causes a near-term reversal that would evolve into something more negative if the blue trend line is broken. The reversal would be upgraded to intermediate if the red trend line is penetrated (refer to daily chart above).
Cycles
There is no need to change what was written last week:
There is a 14/15-wk high-to-high cycle which was once very dominant but less so lately, that is due toward the end of next week. It could bring an end to this phase of the rally.
The dominant 66-wk cycle mentioned above is now about 75% in its current phase and, with each passing week, will exert more and more downward pressure.
Breadth
The Summation Index (courtesy of StockCharts.com) has made some upside progress as a result of last week's strong rally, but not nearly enough to match its intensity. While the indices have exceeded their February highs, the NYSI is still far below, and that translates into strong negative divergence on the intermediate scale! Moreover, that up-move has sent the RSI right back into overbought territory with negative divergence, and the MACD has turned up just in the nick of time to avoid going negative. All of which amounts to this oscillator flashing an intermediate warning -- unless it can continue its uptrend. If it should turn down from its present level, there is a good chance that the SPX and other indices will have made a top and started to reverse.
Sentiment Indicators
The long term reading of the SentimenTrader (courtesy of same) is finally making some progress into the negative half of its range. Is it enough to signal a market top? I'm not sure. I have not kept a record of this indicator's position when we arrive at an intermediate top. I am certain, however, that this is not the kind of reading we get at the end of a bull market.
Following the indicator is another tidbit of meaningful news published in their last report:
The VIX
Any way you look at it, VIX compared to SPX (courtesy of Qcharts) is becoming interesting.
It gave a hint that 1440 might be the top of the move by refusing to go lower while the SPX made a new high at that time. When that did not work out, it only made a slightly new near-term low while SPX soared to a new high. It also held above its 8/20 low. This puts it far above its lower channel line, while SPX touched the top of its channel.
Add to that the fact that, at 14, it is considered oversold and you have another warning that SPX is about to reverse.
XLF (Financial SPDR)
More than any other index, XLF has followed the path of SPX; reluctantly at first, but catching up quickly in the past 10 days and surging on the Fed announcement in what is likely to be a climactic end to the rally which started on June 4th. That, of course, remains to be proven and the index will have the next week or two to do it.
Its indicator is also very similar, down to the divergence appearing in the last couple of days which hints at the approach of a top.
BONDS
TLT has continued its correction, coming down hard on the Fed QE3 implementation, but it may not be knocked out yet. It won't be until it drops below 111, and that's a long ways away! It has reached another support level, but it is not certain to hold there. The beginning of some divergence could be read in the indicator pattern, but nothing that calls for an immediate reversal. Also, although it has reached a near-term P&F projection, another count calls for a potential move down to about 113-114.
This index has to be given some time to firm up. It remains in a downtrend as long as it stays within the confines of the red channel.
UUP (Dollar ETF) Daily Chart.
UUP is another index hit by the ECB and Fed decisions which sent the euro soaring and UUP dropping sharply in the opposite direction. The move, however, does not look sustainable over the near-term, considering that the indicator is very oversold and shows positive divergence. That said, it will have to convalesce for a while before attempting to continue its uptrend.
The P&F chart gives it a projection to this area, but it could be expanded to 21.10 if this level does not hold. Like TLT above, it needs to be given some time.
GLD (ETF for gold)
As pointed out last week, GLD has the same pattern as UUP, but in reverse and, like UUP, there is some pronounced negative divergence in the indicator which may be signaling the end of the move for now.
The specific resemblance stops there since UUP has broken a support level, while GLD still has to penetrate the resistance which looms directly above. Both could have reached a short-term P&F target, with the possibility of moving a little farther in the same direction if this level does not hold. In fact, under favorable conditions, GLD could even go and challenge its former high. It has the base for it.
OIL (USO)
USO has been given new life by the Fed and by the Muslim demonstrations. It has risen above its resistance line and gone one point higher than the 36 target. That does not mean that it is starting a new uptrend. This is where the resistance starts, and it ends several point higher. Besides, USO would have to come out of the red downtrend line in order to do something dramatic on the upside. Iif the market corrects, you can bet that USO will follow along.
Summary
The stock market has responded sharply to the Fed's decision to implement QE3. Short term, and even intermediate term, this could be analogous to the end of a fireworks display when all the remaining rockets are expanded all at once in a spectacular but ephemeral display.
The cycles may now have a chance to re-establish their normal rhythm which has been calling for a top as early as mid-August. Confirmation of a top could come as early as next week, but the Fed-invoked ecstasy could be prolonged a little longer.
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