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
SPX went a little beyond its 1464-1468 projection and may have started to correct. If the index fails to make a new high right away, this should turn out to be the most important short-term correction since the beginning of the rally from 1267, and it could last until mid-October. There has already been enough distribution (?) to send prices down to the low 1400s, but since the top formation may not be complete, the projection may need to be re-adjusted and refined.
We had expected a cycle top in this time frame. The Nasdaq composite and Nasdaq 100 both made a fractional new high on Friday, while SPX and Dow only tested their near-term highs. If we fail to go higher next week, the odds are pretty good that the cycle has topped.
Why only a short-term top at this time and not a more important correction? Because there has been too much strength and it will take a while for it to dissipate. We can see this on the daily chart by the fact that prices went all the way up to the tops of their channels with no evident deceleration. Important tops are normally preceded by price deceleration - which shows that the bulls are becoming less aggressive and are beginning to lose control to the bears. This is followed by the breaking of the trend line which defines the uptrend. As we will see on the daily chart (next), that trend line is much lower than where the index is currently trading, which allows for a good correction without breaking it.
Another reason for this to be only a short-term top is that the price attained in the last rally was only a phase projection and that there are higher potential targets based on the re-accumulation phase which took place at the1404 level. One of these can reach 1482-1488, and another 1494. We could even make a case for 1513, but that would really be stretching the count to its extreme limits. We'll have the opportunity to develop a confirming count during this correction which should clarify what the final target will be.
Let's look at the charts.
Chart analysis
Last week, looking at the SPX Daily Chart, we discussed some factors that could cause the index to find a top in this area. The first was that the 1464-1468 projection had been met. We also mentioned that this target coincided with resistance caused by the conjunction of several trend lines, and that it was reached with negative divergence showing in the momentum indicator; all compelling reasons for beginning a correction.
There was also negative divergence showing in the McClellan oscillator, but more in conjunction with the July top than with the current top. Now, it's clear that breath has deteriorated. That is obvious when we compare the NYMO to the momentum oscillator above. The former has retraced to the zero line and also to a trend line which goes back to the May low. Here, it could find just enough support to cause prices to bounce a little higher from where they closed on Friday. That will depend on whether the 14-15wk cycle has already made its high or if it can stretch for another day or two. Last week, SPX retraced to 1450 and bounced to 1467. The correction will not start in earnest until prices drop below 1450.
Let's see what the Hourly Chart is telling us. On this chart, we can see that a minor trend line has been broken and that Friday's move may simply have been a back-test of that line. We went right up to it on the opening surge, and pulled back away from it for the rest of the day. However, both oscillators are still positive and, until they go negative, we are still in a near-term uptrend, especially since the last near-term high of 1465 was exceeded. If we open up again on Monday, but fail to follow through, we should expect the correction to start taking hold with the index falling below 1450.
Cycles
With the Nasdaq making a new high on Friday, we cannot be certain that the 14/15wk cycle has topped and must wait for confirmation.
There should be a minor cyclical low forming in Mid-October which could cause the market to have a short-term correction into that time frame.
We are also keeping an eye on the 67-wk cycle for a potentially deeper correction into the first week in January, but it may not start before the SPX has completed its intermediate trend from 1267 at a higher level.
Breadth
The Summation Index (courtesy of StockCharts.com) has made a new short-term high and that has nullified the possibility of negative divergence developing in the indicator over the short-term. It is, however, far below the February high (which has been exceeded by the indices), which is causing intermediate-term divergence. For the short-term, the RSI has flattened out in an overbought condition, and that makes it susceptible to a correction. And short-term divergence is showing in the MACD.
Sentiment Indicators
It's time to start taking seriously the degree of "Excessive Optimism” represented by the long term indicator of the SentimenTrader (courtesy of same). Each week it has been edging deeper and deeper into the red zone and is now close to a level which is associated with market tops. This is also what we deduce from other charts and indicators.
The VIX
The following chart of VIX compared to SPX (courtesy of Qcharts) shows VIX refusing to go below its August low, while SPX has risen 40 points beyond its comparable high. It is also remaining at its lowest level since the 2007 high. Like the SPX it has broken its near-term trend line, but it has not yet reversed. The VIX momentum indicator tells us that this could be imminent as its indicator is showing increasing positive divergence and is getting ready to challenge its downtrend line.
XLF (Financial SPDR)
Just as VIX, I consider XLF to be another leading indicator. It was showing some negative divergence on its weekly and daily charts compared to SPX, until it became convinced that the Fed was going to implement QE3. After that, it rushed to catch up with SPX.
Now, it's a different matter. Like SPX and VIX, it broke its near-term trend line, but instead of back-testing the line like the SPX, it has kept on correcting. We can't ignore this type of action which confirms what we are seeing elsewhere: that the market is getting ready for a short-term correction.
BONDS
TLT has found support and had a good rebound, but it's not back in an uptrend. Although it jumped back above its 200-DMA, all it has accomplished, so far, is a back-test of the broken intermediate trend line.
In order to get back in an uptrend, it will have to get back inside the broken trend line, move through its blue moving average and, most of all, start trading outside of the red channel. It's unlikely that it can do all this without some additional consolidation. It's also possible that it will continue to correct if it cannot reverse its current downtrend in the next couple of weeks.
UUP (Dollar ETF) Daily Chart.
The implementation of QE3 has played havoc with what looked like solidly established uptrends. UUP is one of those affected. It has been forced out of a well-defined intermediate channel which was a year old. It has also penetrated an important support level; but if it can get back above it - and stay there -- it will minimize the technical damage. So far, none of this action has destroyed its potential to rise to 25 - as the USD moves up to 90.
The P&F chart had an interim count to 21.60 which could hold the index at this level if enough buyers step in right away. If not, it could decline to 21.10 before regaining its footing.
GLD (ETF for gold)
GLD created a good base before breaking out and it is reaping the benefits. It is trying to re-establish a long-term uptrend, but the jury is still out as to whether it is ready to do that. Its rally has reached a significant zone of resistance which could cause further consolidation.
The base that has been created is large enough to give it a potential count to the former high. However, it consists of two separate phases, the first of which could limit the rally to the general area which has already been reached. Furthermore, the chart shows that the stock is also at the top of a short-term channel and the indicator has built a compelling negative divergence pattern. The combination of divergence and resistance strongly suggests that a pull-back from the current level is likely.
OIL (USO)
The chart of USO speaks for itself. Previous forecasts called for a P&F count to 36, an area of strong resistance which would most likely turn the stock back. In the euphoria caused by the QE3 announcement, the index did move a little higher, but has now begun a sharp retracement.
We must now wait to see if the index has started another decline of substance, or if it is simply consolidating for another attempt at moving through the resistance band. With WTIC having made a small distribution pattern which could take it several points lower, it looks as if USO will see lower prices as well in the near future.
Summary
The market is giving indications that it has reached its maximum short-term potential and is ready for a consolidation of two or three weeks. There could be another half-hearted attempt at moving a little higher, but that would simply enlarge the distribution area which already calls for a move into the low 1400s.
Because there are higher, unresolved, potential targets, and the index price pattern is not one which is normally associated with important tops, this is likely to be only a short-term consolidation rather than the beginning of a substantial correction.
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