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. The structure has been altered by the fiscal cliff resolution 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
From last week: "There was a projection made for the move to end at about 1464 several weeks ago. A review of this target using a combination of P&F, Fibonacci and pivots places the top between 1464 and 1472."
On Thursday, SPX reached 1472.30 and quickly pulled back 5 points. On Friday it pushed to 1472.75, and closed at 1472.05. Last Friday, I mentioned that the rally appeared to be running out of steam. This week, it is even more apparent. While the SPX and DOW industrials managed to eke out a few more points on the upside, the QQQ could not and, as you can see on the charts below, remains far weaker than the SPX on an intermediate trend basis. While the latter has retraced nearly all of its move from the September high, QQQ remains stuck just slightly above the .618 retracement level.
Besides the fact that the SPX has reached the top of its projection zone, there are a number of factors to which I can point that suggest that we are ready for a correction, including the market technicals which we will discuss when we analyze the charts. I must admit that I wish the VIX was giving me a stronger relative strength signal. But I am encouraged by the fact that strong relative weakness is apparent in the XIV and this may be enough to signal an approaching reversal that is normally required from this indicator.
We'll start by analyzing the daily action of the QQQ and the SPX in the charts posted below (courtesy of Qcharts).
Chart Analysis
At first glance, it's obvious that the QQQ (left) is lagging behind the SPX in relative strength. That, in itself, should be a warning sign. Historically, the QQQ has a tendency to lead the SPX up or down. It is true that AAPL is a big influence on the QQQ and, since it has just suffered a considerable correction, this is reflected in the price of the latter. Whether this should be taken into account or not, I don't know! In any case, in looking for a potential reversal in the market, we are not so much interested in what is happening over the longer term, but in what is happening right now, and we notice that, in the last couple of days, SPX moved a little higher while QQQ did not. That would be the first sign (besides having reached the projection target) that a top may be forming, and there is plenty of additional evidence in the chart indicators.
For the first time since the rally from 1398, the upper momentum indicator (CCI) is showing some clear negative divergence in both indexes. This is normally a prerequisite to ending a move. At the same time, the SRSI below is at a level from which it normally corrects. The condition of these two indicators by itself should warrant caution. However, the lower (A/D) indicator makes this even more urgent. After the breadth surge which occurred on 1/02, the A/D dropped off dramatically as the indices moved higher, on Friday; at the close the difference between advances and declines was just about nil.
Over the past couple of weeks, I have been looking for the rally to reach its apogee before being pulled-down into early February by a cycle cluster. Reaching the projected target in conjunction with the display of negative divergence in one indicator and the overbought condition of the other makes it nearly certain that we are ready for a reversal.
By analyzing the hourly chart of the SPX, the deceleration pattern of the past few days is even more noticeable, with prices unable to go past the resistance provided by the extension of the green uptrend line. The hourly indicators show even more clearly the divergences than those of the daily chart. Last week, the A/D indicator spent most of its time in negative territory. This would be acceptable and even normal if prices were correcting, but not when they are rising.
IF we start down on Monday and1472 turns out to be the high, the P&F chart would give us a projection down to about 1398 and perhaps lower. This would bring the SPX down to the level of the former support level and, if we went a few points beyond, would constitute a .618 retracement of the move from 1343. The retracement pattern proposed last week could still be valid.
For a confirmed sell signal, the SPX would have to close below 1452 (the short horizontal red trend line) - and keep going!
Cycles
A good explanation for the continued strength of the SPX is that the low of the 66-wk cycle came a couple of weeks early, triggered by the resolution of the fiscal cliff dilemma, and it was able to push prices up to the projection level before the cycles bottoming in February could take control of the trend.
Breadth
The McClellan Oscillator and Summation Index (courtesy of StockCharts.com) are posted below. The NYMO lost its upside momentum at the same level where all the previous up-moves in that index have occurred for the past six weeks. Should it start down, it is likely that it will go negative very quickly and that would turn the NYSI down from a level below its former top. NYSI is currently showing negative divergence to the price index.
The RSI of the NYSI is now overbought and could start declining at any time, and continue to do so until it reaches the opposite boundary of its range.
Sentiment Indicators
Both indicators of the SentimenTrader (courtesy of same) are currently in their neutral zone. This probably suggests that the market will not have any large move in one direction or the other. This is relevant when we try to estimate whether or not the SPX has made a bull market high at 1474. In order to suggest this, the long term indicator would have to move deeply into the optimistic part of its range. It is nowhere near that level and, if we have a three-week correction in market, that may move it back into the pessimistic part -- even farther away from where it needs to be for a major top.
VIX
After breaking out of a downtrend and surpassing former levels of resistance, VIX collapsed and plummeted all the way down to its October low, retaining a modicum of divergence at that low. This move is so extreme that I can only interpret it as long-term bullish for the market. I will just repeat what I said earlier: that the XIV is showing some strong negative divergence to the SPX, and that may be enough to warn of a top in the equity index.
XLF (Financial SPDR)
The financials have been one of the strongest groups this year and XLF has moved to a new high in unison with the SPX. No divergence! The only negative is that XLF appears to have completed a P&F projection at 17 and is likely to correct from here, which would influence the SPX to do the same.
BONDS
The weekly chart of TLT shows that the index is still in a long-term uptrend, and will continue to be until it breaks out of the green channel and/or drops below its previous low of about 111.
The current intermediate correction may be coming to an end and if, in the subsequent rally, TLT can rise above 128, it will be in a position to re-test its high of 132 and perhaps move slightly higher. If it cannot overcome the 128 level, it will then likely complete a distribution phase ahead of a long-term downtrend.
GLD (ETF for gold)
GLD continues to undergo what is either a major consolidation phase from which it will eventually resume its uptrend to new highs, or a major distribution phase. This will not be made clear until it either breaks out to a new high or falls below 149.
GLD recently reached the low of its 25-wk cycle and has begun to build a base formation. If -- as it appears likely -- SPX begins to correct, GLD could reach a standing P&F count to 157. After that, it may attempt to resume its uptrend and, if it can rise above 175, may be able to move up to about 210/215 -- that count having been established across the base created at its last 25-wk cycle low. This will be reviewed when TLT comes out of its short-term down-channel.
UUP (dollar ETF)
UUP continues to be in a long-term downtrend of several years with no end in sight. However, since June of last year, it has been in a counter-trend rally of intermediate nature. The base which was created between May and September 2011 gives it a count to about 25, the equivalent of about 90 USD.
Since the base does not have a lbig enough to take it out of its long-term downtrend and establish a new high, it is likely that the move which started in 2011 is only a rally in a downtrend which will end around 25. The move is probably only at its mid-point. Subsequently, the index will have to do more work if it is to eventually move to new highs. All this is very far away and does not warrant further analysis at this time.
USO (United States Oil Fund)
Ever since its rally peak of 45 back in early 2011, USO has been in a declining pattern which is likely to go on for some time longer. It recently found support on an internal trend line and has rallied to a minor declining trend line where it should find at least temporary resistance.
In order to complete its correction and attempt another rally of consequence, it will have to break out of the long-term channel that it has created. That would necessitate a move above 42 and higher. Since there are unfilled lower counts, this is probably not in the cards right now.
Summary
Over the past week, SPX rose to the upper limit of its projection zone. There are many signs suggesting that the rally is in the process of ending, but VIX is making an unorthodox pattern which creates some uncertainty. The next few days will tell us whether or not this is an impediment to the market reversing at this time. In any case, a decline into early February will not be confirmed until SPX trades below 1452.
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