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.
Intermediate trend - It is probable that the intermediate correction ended at 1398 and that a new uptrend is in progress which could carry a little further after a correction.
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
Cycles: The 66-wk cycle continues to dominate the trend, pushing the indices higher on Friday, with a good jobs report providing the catalyst. SPX rose to 1514 and there was a lot of fanfare on CNBC when the DOW went past 4000! QQQ remains muted in spite of good action in the semis.
Projections: SPX reached the 1509 projection discussed in the last newsletter and immediately pulled back to 1497 where it found support and started another near-term uptrend. The small base that was created in the process gave the index the means to reach as high as 1522 on this move, but the 1514/1515 level could stop the rally and start the long-awaited reversal into the cycle lows which lie ahead.
Structure: From the standpoint of structure, there are some conflicting views. Some "conventional" EW analysts see a large ending diagonal (with overthrow last week) being formed, and the possibility of a severe decline beginning as early as next week. Others believe that we are in a bull market since March 2009 and that there is much more to go on the upside, with the bulls in control possibly for another year. They also see a correction starting this month, but one which is fairly mild, followed by higher prices before a more substantial decline takes hold.
Who is right? Only the market can tell us, and it is who we shall listen to for the answer.
Sentiment: VIX is still basing after its sharp retracement which matched the lows of 2007. A long- term P&F chart of the VIX shows that, at that time, the index had built a base over a period of several months before it could start an important uptrend. That would suggest that it may still be a while before VIX is ready to signal a market top. At this time, It does not have a base which can support much more than a correction in the market. This warns us not to expect a major decline until VIX has built enough of a base to support one. The price action, however is showing some clear short-term divergence to SPX. This would suggest that, over the near term, a market correction can be expected. VIX has an interesting counterpart, the XIV (VIX plotted in reverse) which we'll analyze later on.
Indicators: As of Friday's close, hourly indicators were overbought and showing some negative divergence. That, too, suggests that a near-term pull-back is due.
The daily indicators agree that any correction, at this time, should be minor. With the exception of the NDX, perhaps, they do not appear ready to signal a substantial decline. We'll discuss why next.
Chart Analysis
NDX has historically led SPX and, for this reason, has normally been used to predict reversals in the market. With the impact of AAPL on that index, it is probably best to use another index which also has predictive value for SPX reversals. That index is the Russell 2000, and this week we substitute it for NDX (charts courtesy of Qcharts).
Right away, we can see that there is an enormous difference between its daily chart and that of NDX. It is tracking SPX much more closely than NDX - but not exactly! Over the long term, IMW has already made an all-time high and is therefore stronger than SPX. That would seem to negate a near-term bull market top for SPX. But we are mostly interested on comparing the short-term performance of the two indices to see if a warning about an imminent top is surfacing.
Of interest is the fact that, in the last 5m of trading, 2.25 million shares of UWM were sold while SPX rallied. Perhaps this does not mean anything, but later on, XIV did the same thing, except that XIV sold off near to its lowest level of the day, and this dual action could have some significance concerning Monday's opening!
The only notable difference on the daily chart is that, on Friday, IWM's second leg of the rally from the November low duplicated exactly the length of its first leg, while SPX has already exceeded it by about 10 points. These two subtleties may be meaningless, but...! We'll find out on Monday if they are.
Now, let's take a look at the SPX Hourly chart to see if we can garner more near-term clues.
I will leave it up to the experts to determine the structure of the move from 1/9 to now. If Friday was the start of wave 5 from 1398, it seems that it would need to extend a little more to be proportional with wave 1. But if we retrace on Monday, it calls into question the entire pattern from 1/9 because, in that case, wave 5 would turn out to be a little less than one third of wave 1. This, at the very least would be an anomaly if not a condition that would invalidate Friday's wave as wave 5. If we do make a new high on Monday, it would have to be considered the 5th wave of the so-called wave 5.
In the indicators, we see that negative divergence is already afflicting the momentum, and it will not dissipate unless we have a very strong extension of the move. The hourly MACD histogram of the A/D is just turning red.
Monday's action should clarify the market condition and give us additional information about what lies ahead.
Cycles
The 66-wk cycle, which bottomed on 12/28 keeps pushing prices higher. There is a good possibility that this underlying strength has caused an inversion in the smaller cycles that were due to make their lows in the first few days of February. However, another set of cycles are due to bottom in mid-month and could still bring about the expected correction.
Breadth
The McClellan Oscillator and Summation Index (courtesy of StockCharts.com) are posted below.
The McClellan Oscillator has begun to establish a downtrend but has found support at the zero line and bounced. As a result, the NYSI has started to flatten out. If the NYMO continues its downtrend, it will start a decline in the Summation Index. This would bring about an overdue correction in the RSI which could continue until it has become oversold.
Sentiment Indicators
It looks as if the SentimenTrader (courtesy of same) has refined its charts to indicate the difference between a mildly overbought or oversold warning and one that illustrates a seriously overbought or oversold condition.
For the time being, even though the long term indicator has moved up slightly, it remains in the mildly overbought zone thereby signaling that only a simple correction may take place at this time. The short term remains neutral.
XIV
I have chosen to look at the reverse VIX because, when you compare it to the SPX, it is easy to see why this market is ready for a correction. SPX is still making new highs, but XIV peaked on 1/24 and has continued to diverge from SPX ever since. The fact that it made a lower high on Friday while equity indices were making a new high may attest to the imminence of a reversal. However "strong" the market is, the cycles due to make their lows in mid-February should shortly begin to exert their downward pull.
It is not easy to see on this hourly chart because the price print is small, but the last candle closed on its low, matching the action discussed in IWM. Should both indices follow through on Monday, it could trigger a similar response in the other indices.
XLF (Financial SPDR)
There is little contrast between XLF and SPX. The two are in sync and this tells us nothing of value about the near-term market direction.
BONDS
TLT continues to correct and is now aproaching its next phase projection of 115. Since it touched 115.50 on Friday, it may be close to finding support - unless it decides to close the gap which occurred last April and which would take it down to about 113. Next week should give us a clue. At this time, we should still consider TLT's action as a correction. Its long-term future will be decided after we have had a chance to evaluate the next rally.
GLD (ETF for gold)
GLD continues to form a base from which it will have the opportunity to move outside of its correction channel when it is complete. There is still a chance that it could see 157 before it completes its downtrend. Its long-term prospects are still under evaluation.
UUP (dollar ETF)
If UUP does not rally right away and touches 21.50, it could drop down to 21.30 and perhaps even 21.10 before finding support. Current weakness is the result of strength in the Euro. The latter has become overbought short-term and may have reached a phase projection at FXE 36. This could instill some consolidation in that index and allow UUP to stabilize.
USO (United States Oil Fund)
USO continues to try pushing through its resistance zone, but it looks half-hearted and the divergence beginning to show up in the momentum indicators suggets that a consolidation (at least) is in order. If UUP does not retrace too much ground on a pull-back, it may be able to continue its uptrend to 38 to complete an intemediate a-b-c pattern. Mostly, USO appears to be moving in tandem with the stock market and should correct when SPX starts to correct.
Summary
SPX continues its uptrend and may have reached a phase projection target based on the re-accumulation pattern around 1500. However, that P&F pattern also carries the potential for 1522, so we must wait to see if a pull-back starts from this level or if it waits for the higher target to be reached.
There is a good possibility that the cycles that were due in early February have inverted, but others bottoming around mid-month - along with the potential completion of the near-term structural pattern -- still hold the probability of a correction into that time frame.
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