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 top at 1474. A mid-correction rally is underway.
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
Last week's newsletter discussed the probability of a mid-correction rally starting from the 1335-1341 level, the possibility that a short-term low had already been reached at 1343, and that a reversal had already started. The forecast turned out to be correct, but the mid-correction rally is even stronger than anticipated. I had an initial phase projection of 1403, but on Friday SPX closed at 1409. Although Friday's momentum could spill over into Monday, SPX is giving indications of having completed this phase of the rally and is ready to start a retracement. I have already mentioned that the reason for this pull-back would be the cycles that are due to bottom at the end of the month and that which are likely to produce a retracement of about 50% of the move from 1343. This is reinforced by the fact that this would be a retracement down to the level of the 4th wave of the 5-wave move which ostensibly just ended. For SPX, this would take prices back down to about 1377.
A reason for the rally to end at Friday's high is that it represents a 50% retracement of the entire decline from SPX 1474. DJIA has retraced slightly less than 50%, while NDX has only retraced slightly more than .382 which still makes it the weakest of the three indices.
Following the near-term correction into the end of the month, a resumption of the rally is likely with marginal new highs anticipated, perhaps extending to .618 of the decline from 1474. That would bring SPX to about 1424. Upon completion of this move, the intermediate decline could then continue into the original forecast time slot of early 2013.
I have given a forecast of what could happen over the next few weeks based on cycles and Fibonacci projections that seem logical. Let's see how accurate this scenario will turn out to be.
In last week's newsletter, I also mentioned that AAPL had most likely reached a near-term low in a climactic fashion. That also proved to be correct. By Friday's close, the stock had tacked on another 42 points.
Chart Analysis
Besides the reasons given above for the rally to end on Friday, we should add the fact that this looks very much like a back-test of the broken intermediate trend line which also puts the SPX just below a congestion pattern that is likely to provide resistance. The index has also retraced the full width of the channel that was created by the decline from 1474.
Some felt that the bull market might have come to an end at 1474. That's very unlikely, and the current decline is probably only a re-adjustment in the long-term trend. The bottom green line is the trend line drawn from the 2009 bottom across the October 2011 low. At a minimum, that trend line would have to be broken and prices would have to trade decisively below 1267 for the bull market to come to an end. The SPX is nowhere near satisfying these requirements. Currently, it seems to have difficulty keeping an intermediate decline going. Last week, the daily trend dropped below its 200-DMA, but this week it climbed back above. Even with the intermediate cycles ostensibly down into early next year, it's unlikely that the index will satisfy those bearish criteria and, when the cycles turn up, the line of least resistance will again be on the upside.
The hourly chart gives us a more detailed view of the decline from 1474. The low of 1343 -- marked by divergence in all the indicators -- started a week ago Friday with a small wave that formed a base, and a count to 1403 on the P&F chart. The count was filled and even exceeded on Friday -- a day of curtailed trading when low volume often produces excessive volatility.
The rally has now completed 5 waves, retracing to the broken (blue) intermediate trend line, to the 200-hr MA, and to a resistance level (small red horizontal line). These are all good reasons for the rally to have come to an end where it closed on Friday. Furthermore, divergence is showing on the CCI and on the A/D indicator positioned below the price chart. Nevertheless, Friday's "strength" could still spill over into Monday.
Providing that the above analysis is correct and that the SPX begins to pull-back, I have drawn a small horizontal brown line at the bottom of the 4th wave of the move to identify the most logical near-term correction point before a resumption of the rally.
Cycles
The market should now be ready to retrace into the cycle low due at the end of the month. This should be followed by a completion of the rally and an intermediate cycle low in early 2013.
Breadth
The McClellan Oscillator and Summation Index (courtesy of StockCharts.com) are shown below.
When the NYMO drops to the level of the green line, there normally occurs a trampoline effect whereby the index rebounds sharply. This took place again this time. A week ago Friday, the index started to rebound and followed through over the next few days. This has propelled it back above the zero line and above the former near-term peaks, and even outside of the downtrend lines. Its effect on the NYSI was to stop its decline, but upside momentum has yet to be established and the RSI is still very oversold and could remain in the lower half of its range until the intermediate downtrend reverses.
Sentiment Indicators
The long term indicator of the SentimenTrader (courtesy of same) has moved back to neutral and is no longer exerting a positive influence on stocks. The short-term indicator has turned very optimistic, indicating a potential near-term top.
VIX
After clearly identifying a low point in the market, VIX is now doing the opposite. It had a sharp retracement to the lower portion of its base, but it has begun to resist the downtrend. In fact, for the past two days VIX refused to confirm the surge in the SPX and has stayed above Thursday's low. This has caused positive divergence to develop in the CCI, and started a strong uptrend in the SRSI.
These are additional signs that the market has reached a near-term top and is ready to reverse.
XLF (Financial SPDR)
XLF continues to show some intermediate-term strength relative to the SPX, but is trading almost tick for tick with that index on a short-term basis. Like SPX, it has rallied to its 200-2hr MA and to a resistance level, and is in the process of back-testing a broken trend line. The only thing that is different is that the rally does not show a clear 5-wave pattern like the SPX.
BONDS
TLT has come down with the stock market rally, but it remains in an uptrend from its 119 low and, like VIX has refused to go down for the past two days while the SPX tacked on another 20 points to its rally from 1343. As a result, like VIX, its indicators have turned and, although they have not yet given a buy signal, are getting bullish. This has the same implication as the VIX and is a warning that SPX should be ready to retrace into the month-end cycle low.
GLD (ETF for gold)
Since it found support on its 200-DMA, GLD has bounced up in what appears to be a mid-decline correction of its own. If, as is anticipated, the market starts to pull-back, it's a good bet that GLD will do the same.
It's not likely that GLD will have any kind of a sustained uptrend until it has completed its correction into the bottom of its 25-wk cycle due in late December.
UUP (dollar ETF)
UUP has not convincingly reversed its downtrend from the 23.10 top and may have to continue its correction until it has filled the P&F projection down to 21.30. The daily indicators have given a decisive sell signal and will require some time to get into a position for a trend reversal. Near-term, UUP has come to rest on a recent congestion level which could hold up prices for a while longer.
USO (United States Oil Fund)
USO continues to do little more than trade in a sideways consolidation pattern which started when it found support on an internal parallel to the top long-term channel line. This consolidation is now about a month long, and the index showed its inherent weakness when it was not able to react more forecefully to the recent Gaza conflict. Although it appears ready to exit its short-term down-channel, an eventual decline to a new low does not look too distant.
Summary
The anticipated mid-point rally within an intermediate downtrend took hold at SPX 1343, producing a strong rebound which has already retraced 50% of the decline from 1474.
Several technical factors suggest that this phase of the rally is coming to an end, although Friday's strength could spill over into Monday. After that, a pull-back into month-end is likely, dictated by cycles bottoming into that time period. A limited extension of the rally should then begin and, when it's over, the market should be able to resume its intermediate decline into early 2013.
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