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
Looking at things too closely hampers one's overall perspective and can lead to confusion. This is true with the stock market and this is why what happens on a day-to-day basis makes much more sense if one has a good idea of what the market is doing over the longer-term.
We are currently in a bull market which started in March 2009 and which has given no indication of having ended. When the SPX reached 1474, it started an intermediate-term consolidation which is ongoing and will probably not end until early 2013. To put it in graphic terms, from 1474, SPX declined to 1343, most likely completing the "A" wave of an A-B-C correction. That puts us in a "B" wave counter-trend rally which has not yet ended. When it does, we should start the next decline into early 2013. So where are we in this "B" wave?
There are several possibilities. The first is that the rally has already ended at 1419. There was a P&F phase projection to that level which, obviously, has some merit because since touching 1419 early on Thursday morning, the index has consolidated and traded in a narrow range. At this time, the market condition is neutral and does not show much weakness. This suggests that we should soon rally to our next phase projection of 1424, perhaps even extending the move beyond.
1424 is not only a P&F projection, but it is also the level at which SPX would complete a .618 retracement of the decline from 1474. From that standpoint, 1424/1429 would be a logical level at which to end the "B" wave, but... with congress currently trying to find a way of avoiding going over the "fiscal cliff", if an agreement is reached between the two parties over the near-term, the SPX has the potential to surge to about 1445 and perhaps even to 1464 on the news. Based on cycles, if there is no resolution over the next week, wave "C" could begin its descent into early next year.
With this perspective in mind, we can monitor the market's activity over the near term and see which course it decides to take.
Chart Analysis
The daily chart of the SPX -- to which I have added the NYMO -- is very revealing in many respects. First, if our hypothesis that this is a "B" wave is correct, it would not be unusual for it to come out of the initial down channel before coming to an end. The downside pressure was sharp but brief and prices quickly got back above the 200-DMA, and even above the intermediate trend line, which eliminates the possibility that this is only a back-test of the broken trend line. The rally has now essentially reached the 50-DMA and if it goes through it, it would be a sign of continued strength; especially since the MA, combined with a .618 retracement to 1424 and a P&F count to that level could offer significant resistance and put an end to the rally.
Not readily seen on the bar chart, but very prominent on the P&F chart is the fact that during the past two days of trading, a ledge has formed which is already 22 points across. The action of the index over the next few days will tell us if this is accumulation or distribution. If we touch 1424 and pull back below 1400, it will be an indication that the move is most likely over, but we could also touch 1424 and continue to consolidate before moving higher.
The two indicators at the bottom of the chart developed plenty of momentum during the rally and are strongly positive, but overbought. However, they do not show any negative divergence, and this could indicate that the move will not be over until they do. More impressive yet is the NYMO which has reached the level where it was at the 1474 top, and is matching price momentum oscillator tick for tick. When we get close to the end of a rally, negative divergence tends to first show up in the NYMO. In this case, its MACD histogram is not even showing deceleration. Until we have some clear signs that a top is in the making, it is best to be ready for higher prices. Anyway, as long as SPX holds above the green trend line, the uptrend should be safe.
The SPX hourly chart gives us a better view of the market's recent action. The cycles which were supposed to pull the index down into the end of the month reversed early - and quickly! It was a two-day affair with the second day a 14-point decline that changed course instantly, with buyers anxious to get in ahead of the 3rd qtr. GDP's strong upside revision the next day. That move carried back above the blue intermediate trend line and went through the 200-hr MA that had stopped the previous rally. There was also little retracement in spite of hitting fairly strong overhead resistance. These are all signs of strength and if we can get past 1424, there is a good chance we'll get past the 1434 level as well, opening the way for 1445 and perhaps even 1464.
Cycles
The pull-back into the end of the month was brief and shallow.
An intervening high could show up in the next few days and bring an end to the "B" wave rally.
The intermediate low is still expected to be in early 2013.
Breadth
The Summation index (courtesy of StockCharts.com) is back in an uptrend and shows no sign of reversing. The RSI has only reached the half-way point of its range, so it has plenty of room to move higher, even if it only gets to a mild overbought level. This would imply more strength in the market over the next few days. Conversely, the inability to move much above the 50% line would be a sign of weakness.
Sentiment Indicators
Both short-term and long-term signals of the SentimenTrader (courtesy of same) have moved back to neutral.
VIX
VIX is giving a warning that we could be at or near a short-term top in the SPX. It has failed to make a new low since 11/21 while, during that time, SPX has moved up about 30 points. This is the kind of condition that alerts us to a potential reversal.
XLF (Financial SPDR)
The warning being issued by VIX is duplicated in the XLF. The same condition described in the VIX essentially exists in the XLF. It made a high on the 23rd and has refused to go higher since, while the SPX has tacked on another 11 points. Can both of these leading indicators which have a good record of pin-pointing reversals be mis-leading us this time!
Their warnings appear to be at odds with the strength which is still apparent in the indices. The next week's action should clarify the market's intention.
BONDS
TLT continues to consolidate in a downtrend ... or in an uptrend, take your choice! The latter seems to be more logical since it tends to go against the market and we are expecting a low in early 2013. This could lead to a test of the high and even perhaps to a new high. The index has an unfilled potential to 137, but reaching it will become less and less possible if it does not do it by the time the market concludes its intermediate correction.
GLD (ETF for gold)
There is no change in the prognosis for GLD. Its sudden drop from 169 to 166 suggests that it has most likely achieved its near-term potential on the upside.
It could be making a pattern which is very similar to that of the market. Because it is expected to continue its correction into the 25-week cycle low bottoming at the end of December, it too is in an A-B-C correction and may already have begun the "C" wave. It has strong support starting at 156, but could continue down to about 152 before making a low. 160-162 is the minimum expectation for the end of wave "C".
UUP (dollar ETF)
UUP has found support at the previous near-term highs and could hold at this level before continuing its uptrend. Some additional consolidation is probable, perhaps in a sideways pattern. If it cannot hold this level, there is a potential projection down to 21.30 which looks unlikely to be realized at this time, but should be kept in mind.
USO (United States Oil Fund)
Investors are still showing little interest in USO. The index continues to trade in a sideways pattern and has hardly participated in the current market rally. This could be telling us something important.
First of all, it is obvious that over the long term, USO is increasing its relative weakness to the SPX.
When SPX made a new high in March 2012, USO peaked well below its May 2011 high. Again, in September SPX made another new high, but USO traded nowhere near its March 2012 high. The intermediate lows show the same negative patterns. USO made a slightly new low in June 2012 while SPX remained substantially above its October 2011 low. And there is no sign that this trend is being reversed as USO continues to show relative weakness in its current decline.
The P&F chart projects that USO should drop to a new low of 29 by the time the intermediate correction in the market comes to an end, and this makes USO valuable as a confirming indicator. You will notice that since May 2011, USO has participated in every intermediate trend, and is still doing so today. Now look at the pattern that USO has made since SPX re-bounded from 1343. Does it look as if it has started an intermediate uptrend? No it does not, and if we take the projection at face value, it won't do so until it reaches 29.
This is a strong indication that SPX did not conclude its intermediate correction at 1343 but that it is only experiencing a counter-trend rally. Its correction low will most likely come when USO meets its 29 target. Cycle-wise, that will probably be in January/February 2013.
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."
That was the situation a week ago. Now, it looks as if SPX will retrace at least .618 of its decline from 1474. That would bring it to 1424 which also happens to be a P&F projection, and would put it in the vicinity of the 50-DMA. That could make 1424 an important inflection point.
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