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 severe correction of 2007-2009 will have curtailed the full downward pressure potential of the 120-yr cycle.
SPX: Intermediate trend - SPX made a top at 1474 and is engaged in an A-B-C intermediate correction. It is possible that wave "B" was completed at 1448.
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
It is obvious that the near-term direction of the market has been influenced by negotiations to resolve the "fiscal cliff" situation. Optimism about an early solution has kept the trend bullish until Thursday, when the mood of the house republicans dashed hopes for an immediate resolution and caused the market to drop sharply at the opening. Although it did recover some of its losses by the close, enough technical damage was done to bring the indices very close to a sell signal.
With Monday being a shortened session, we may have to wait until Wednesday to see if we can drive the proverbial final nail in the coffin of the "B" wave. When the "C" wave of the intermediate correction starts in earnest, we can expect something similar to the "A" wave from 1474 and, if the time span of the "C" wave is equal to that of "A", it could last until mid-February before it is complete.
Of course, we have to consider the possibility that 1474 was the top of the bull market and that we are now on the verge of a new bear market. Some EW technicians see the pattern described by the DOW since April 2011 as a large diagonal triangle which would characteristically put an end to the bull market that started in 2009. Whether or not this is the case is something we do not have to be concerned about just now. We already agree with the bear view that a significant decline is coming, early next year. What happens after that is something that we will have to assess at the proper time. Our present analytical efforts should be to determine whether the "B" wave (or "2") already ended on Thursday of last week, or if it has a little more to run.
Attempts at establishing a price projection for the SPX has produced two possibilities: 1443 and, if there should be a final surge, 1464. The index price has been hovering around 1443; first with a reversal from the 1439 level, and another, Tuesday, from 1448. Technical considerations suggest that the rally is in its last stages and looking for a final high. Perhaps it was already met on Tuesday, but we'll need confirmation. There is a good possibility that next week will give it to us.
Chart Analysis
This weekly chart of the Dow shows the two possible scenarios that lie ahead for the market. In the bearish case (which is not favored) we would be ending wave 2 and be about to start wave 3. That wave would most likely be a period of intense weakness probably taking the index to the level of "B" before it ends. Needless to say, it would be devastating to investors, re-sending their 401Ks right back into the tank. But that would only be the beginning of a vicious bear market which, according to cycles, should continue until the low of the 120-yr cycle around October 2014.
The bullish view would be far less harsh. The intermediate decline would conclude early next year, and the bull market would go on to make a new high, peaking perhaps around May 2013. It would then start a bear market into October 2014 which would be bad enough, but not nearly as severe as the first scenario. This is the option which I favor.
One of the weakest indices is the NDX. It has retraced less of its decline from the September high than the SPX or Dow, and is the one most ready to sell off whenever there is a pull-back in the uptrend. Friday was a good example of this tendency. Although (like the overall market) it had regained a good portion of the day's loss by the close, it remained below both moving averages -- the only one of the three to do so. Since NDX normally leads the market, its relative weakness is an indication that we are in a correction phase and have not started another uptrend. Also, the pattern that it is making is a small diagonal wave which was probably completed on Wednesday. A signal that the "C" wave is on its way will be confirmed when it closes below the red horizontal line.
The indicators are also showing some weakness, especially the histogram which exhibits a strong pattern of negative divergence to the price. The RSIS is overbought, has already turned down for the second time, and its lines have already made a bearish cross. It does not look like a confirmed sell signal is very far away.
The SPX, which has been buoyed by strength in financial stocks, is the strongest of the three indices shown, but its hourly chart (below) shows that the pattern it is making is also a bearish wedge which may have been completed at 1448. If so, there is a good chance that on Monday, there will be another near-term decline before we have a bounce. The price formation made during Friday's recovery looks like a small bear flag on the hourly chart. If it is, the index risks dropping to about 1412-13 - the length of the flag mast. Coincidentally, this is also a near-term phase projection for this index according to the level of distribution above.
The indicators have rallied along with the price on Friday, but not enough to give an hourly buy signal by the close.
Cycles
For a while, we have been looking for the declining 66-week cycle to reassert itself and lead the market lower into early 2013. It is overdue!
Breadth
The McClellan Oscillator and the Summation Index (courtesy of StockCharts.com) are posted below. They look like the price charts: toppy - especially the NYMO where a significant deceleration pattern has resulted in substantial negative divergence, but they have not yet given a sell signal.
The RSI of the NYSI has now entered the overbought zone and will probably precede its index in turning down. This should happen as soon as the NYMO turns negative.
Sentiment Indicators
"The short-term signal of the SentimenTrader (courtesy of same) has come dead center and could not be more neutral."
What else is there to say?
VIX
VIX had some interesting moves this week. I will preface comments about the chart with a couple of emails which I sent my subscribers on Thursday: 10:44 am Something interesting is happening to VIX which has shown a lot of strength in the past couple of days. This morning it traded at its highest level since mid-November. If it keeps going, it will spell trouble for the market. 3:29 pm I am getting concerned by the action of the VIX which is on its high of the day and climbing. This is a sign of caution which should not be ignored.
You know the rest! At Friday's opening, futures were down 21 points. Another remarkable act of foretelling by the VIX.
That said, and although intraday it rose to the highest level since November, the index did pull back sharply at the close, indicating that it might have a little more work to do before a complete break-out which, conversely, would suggest that the market may have to do the same before starting a significant drop.
XLF (Financial SPDR)
There does not seem to be any way to halt this runaway train (whose behavior has greatly impacted that of the SPX), except that the SRSI has now made a triple top, and negative divergence has now formed in the CCI. Could that be it? Not to mention the negative candlestick pattern which developed on Friday. Could that mean that it is finally ready to reverse? We'll find out next week.
BONDS
TLT seems to be holding above the level of the former low that it tested four days ago. If it continues to do this for the next few days, it will probably be ready to have another go at re-establishing its uptrend. This would certainly be true if the market is ready to correct for the next couple of months. Let's give it a chance to confirm its intention and we'll see what the P&F chart projects for an up-move.
GLD (ETF for gold)
"...it will probably not be too long before GLD succumbs to the downward pull of its 25-wk cycle which is due to make its low in late December. By then, it could drop to the next support level shown on the chart. This would coincide with the standing P&F projection down to 157-159."
Like a well-trained dog who obeys his master's commands, GLD lived up to its expectations and dropped down to its next support level and projection. There could be a little more decline to 157, but the index should now start to build a base, assisted by the 25-wk cycle which should slowly start to turn up. We'll discuss the longer-term prospect for GLD after that base is built.
UUP (dollar ETF)
Like TLT, UUP may also have found the support level needed to halt its decline and complete its correction. The next few days should tell. In any case, it would be logical for the index to start up as the market begins to correct. The two are usually in reverse sync.
USO (United States Oil Fund)
USO continues to be of little interest to traders and investors. It will have severe technical complications if it tries to go up and therefore may not even attempt to. The intermediate line of least resistance is probably still to the downside and it would not be surprising to see it trade around 28-29 over the next couple of months in conjunction with a market decline.
Summary
With the end of the month fast approaching and still no resolution in sight over the country's fiscal problems, every day is another opportunity for the market to start wave "C" of its intermediate correction from 1474.
I want to wish all my readers Happy Holidays & a Prosperous New Year
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