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 - SPX has made a triple top, which is a bearish pattern. It has now given a strong indication that an intermediate correction is underway. However, we may be approaching the mid-point of the correction which is usually punctuated by a rally.
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
In spite of having reached a price objective with some positive divergences showing up in the hourly indicators last week, SPX could not hold 1372. The bulls put up a good fight to keep from losing that level, but the bears won the battle. As a result, a distribution pattern was created on the P&F chart from which we were able to derive the extent of the next decline. If we take a complete count across the distribution pattern, we get a projection down to 1335. That would be the extreme level to which the SPX could decline on a short-term basis. A more reasonable count would be down to 1339. There are some strong indications that a move down to those levels would complete the declining phase from 1388.
On Friday, the index made a low of 1343.36 and rallied sharply on a news report that progress had been made by the two political parties on how to resolve the fiscal cliff issue. Since the past three days have created a base 47 points across, if SPX were to break out of this base decisively, based on this degree of accumulation it could make a run to the 1400 level. While this sounds like a big counter-trend move, it would actually be less than a 50% retracement of the decline from 1474.
A "decisive" break above 1361 would be needed to get things started. Near the close on Friday, the index managed to get up to 1362 and then hesitated, apparently unable to reach a decision about whether or not it was ready to rally. From a cyclical standpoint, this lack of decisiveness makes sense. Although we have reached the cyclical low predicted for this week, we may not be ready to move up until another cycle scheduled to bottom toward the end of the month has been satisfied. Two potential scenarios could unfold: (1) a break-out with limited upside potential could take place, followed by additional consolidation into the end of the month, or (2) prices could remain confined to the base for another 10 days or so before starting to move up. In this case, there is a chance that we could retrace to 1335 before starting the rally.
Let's see if we can get some clarification by looking at the charts.
Chart Analysis
In the past, I have usually started my analysis with the SPX. Today, I am going to start with a leading (contrary) indicator which appears to foretell with a great deal of accuracy the important turns in the market. In previous articles, I have been showing the VIX vs. SPX on an hourly basis. Today, I want to show it on a daily basis (courtesy of Q charts) using the Dow for comparison. I have identified the reversal points with stars on the VIX chart as well as a line which connects them on the two charts. Red is for top and green for bottom. I have labeled the most important reversal points, but if you look closely, you can probably find lesser ones.
The warning time does not necessarily have a correlation to the reversal degree. For example, the June low was only given one day's notice and it was an important low.
Now let's look at where we are today. The VIX broke out of its base and overcame a year-long trend line on October 22. It also made a slightly higher high than its September short-term peak. And that was it! I had expected that this would mark the beginning of a substantial market decline -- which it did -- but what was confusing was the fact that the market kept declining while VIX was unable to rise above that initial break-out point. The inability of the VIX to make a new near-term high also obscured how much weakness there was going to be in the market. Apparently, this is one time when the lead time projecting a reversal has been ample. The action of the market itself and of AAPL (which I consider to be a lead indicator and which will be analyzed next) are strongly suggestive of the approach of a short-term low in the indices.
The intermediate decline is expected to continue until the bottom of the 66-week cycle in January, but it is not unusual to get a mid-point rally in a decline of this scope. The market becomes very oversold and this is rectified by a counter-trend move. Since many analysts are making noises about the fact that a bear market is now underway, this is a perfect time for it. For whatever reason, the market always seeks to deceive the greatest majority of investors.
Now let's look at the chart of AAPL. The reason I pay attention to this stock is because it price action is strongly coordinated with the NDX and, consequently, with the market as a whole.
I suspected that the stock had made a climactic low at a higher level. That was not the case, but this time, it sure looks like it has done so with a 25 point reversal on Friday which, on the hourly chart shows up as a bullish engulfing candle (which engulfs the range of the two previous hours) and is supported by the highest daily volume since March. It also closed near the high of the day, but not on the high, showing the same kind of hesitation as the SPX. We'll see if it pushes through on Monday or needs further consolidation. The stock is also finding support at the bottom of several channel lines of various time frames and, although it broke below what could be an important support point - the low of the May correction - it did close above it.
Both daily and hourly indicators show positive divergence, but neither has yet given a buy signal -- although it would not take much for the hourly to do so. Taking into consideration the reversal warning issued by the VIX, if AAPL has made a short-term low, it means that the NDX has also made a low, as well as SPX and Dow.
I am not going to show the daily chart of the SPX, but I am going to show the hourly. I have also positioned an hourly oscillator of the A/D beneath it.
SPX accelerated its downtrend when it broke below the 1396 support level in conjunction with breaking its intermediate trend line. It tried to find support at the bottom of a channel drawn across previous lows, but could not and continued lower, forming a wider channel whose bottom trend line extends to the 1474 top. By then, it had developed some positive divergence in both momentum and A/D indicators and had nearly reached its new projection target of 1339/40 -- which might have been attained had it not been for positive news which led to a 19-point rally from that low.
The initial rally found resistance at 1361, a level which it had been unable to overcome earlier. Then followed a normal retracement of about 50% and another attempt at breaking above 1361. It managed 1362 just before the close, but pulled back again slightly instead of making a clean break. If you look at the chart you will see that it is meeting with resistance at the narrower channel bottom trend line. Whether this is enough to contain it, we'll see on Monday. If it does break out, it has an initial P&F target to 1369, and perhaps even 1375 before being pulled back by the cycles bottoming at the end of the month.
On Friday, the CCI did manage to become positive but will need to follow through. The SRSI is already overbought but it can stay in that position for some time before turning down while prices continue to advance. SPX did close outside of its short-term trend line and this could open the door for some additional price rise near-term.
Cycles
The cycle cluster scheduled to bottom in the middle of the month (29-30wk cycle and others) could cause a little re-bound before we pull back one more time before starting a decent rally. It will depend on how much downward pressure the cycles that are due toward the end of the month will be able to muster.
Breadth
The McClellan Oscillator and Summation Index (courtesy of StockCharts.com) are shown below.
Last week, the NYMO finally dropped below the moderate correction level shown by the blue line, and continued down to the green line which shows the oversold level from which rallies normally develop. It only remained there one day and had a sharp reversal on Friday.
As for the NYSI, it just dropped lower without rallying, but its RSI has achieved an oversold level which seldom gets worse. In fact, it is now at the second most oversold level reached by that indicator in the past two years. This should lead to an oversold rally as well.
Sentiment Indicators
The long term indicator of the SentimenTrader (courtesy of same) is finally showing that investors are getting off their complacent duffs and beginning to get bearish on the market. This coincides with the rising tide of opinions that we are in a bear market. What better time for a rally to take hold?
XLF (Financial SPDR)
This index has relative strength with the SPX over the intermediate term but is neutral short-term. It has an almost identical downtrend pattern to the SPX since the 11/06 high. The indicators are also in nearly identical positions. Unlike VIX, there is nothing here to confirm or deny that the SPX has made a short-term low.
BONDS
The TLT chart shows the top of the long-term move (an all-time high) and the subsequent correction which may have ended on 9/14 with a reversal and the building of a small base, followed by the break out of that base and the correction channel.
There are two possibilities for the future trend: (1) this is only the half-way point of the correction and the index is getting ready to resume its downtrend, which would require breaking below the lower short, green line or, (2) after some additional consolidation, TLT will either re-test the high or make a new high.
As for the short-term, the index is beginning to struggle with its uptrend (which is causing some deceleration in price) but it has not yet reversed. Since the CCI has not yet given a sell signal and has been oversold for about a week, it may cause TLT to slightly extend its uptrend before turning down.
GLD (ETF for gold)
On its way down from 168, GLD broke its first support level and came to rest on the second (200-DMA) from which it had a bounce. Last week, I suggested that it might find some resistance on the small horizontal red trend line, which it has, and which caused it to pull back three points. It's difficult to see how it could have much more of a decline right away if the market is going to have a mid-correction rally, so we can probably expect the near-term trend to turn up again, perhaps reaching the top channel line (blue) before rolling over again.
If GLD does not have much of a rally from here - especially if the market does rally - it will be an indication that some decent weakness can be expected into the cycle low. In any case, subsequent action should form a P&F pattern which will help us determine the extent of the decline into the 25-wk cycle low.
UUP (dollar ETF)
UUP normally goes against equities and gold. The index appears to be extended short-term and eady to pull-back. This can be seen in the indicators, one of which is very overbought and the other beginning to show some negative divergence. If a short-term top is forming, this should help the market to find a short-term low.
USO (United States Oil Fund)
USO has found temporary support on an internal trend line which may turn out to be the median of a large, down-sloping channel. It has been consolidating at this level for about three weeks in a very small range which is still contained within its short-term downtrend from mid-September.
The current action shows that there is little investor interest, especially by buyers who probably realize that the index is undergoing a long-term correction which started at 44 in April 2011 and which is far from over.
A break below the current support line would probably send USO back down to the 29 level which has arrested declines on two separate occasions.
Summary
SPX could not hold the 1372 level and dropped to a new intermediate downtrend low last week.
The level of distribution made above 1372 called for a potential decline to 1335-1341. The index found good support at 1343 and rallied sharply on Friday. There are strong indications (discussed above) that we could be ready for a mid-correction rally, but cycles bottoming at the end of the month could pull prices back one more time before the rally can get into high gear.
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