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: Cycle analysis is a helpful component of market forecasting, but cycles are fickle and can be understated, overstated, early, late, or they can invert. For this reason, cycle analysis should be supplemented with other technical tools.
Recently, some cycles have shown a propensity for inverting and even the best have found it difficult to make the right call. This is a condition which occurs from time to time in the stock market; an aberration which will eventually revert to the norm.
Currently, cycle analysis projects the rally to be peaking and ready to reverse at any time. The 7-wk cycle is due to make its low on about 2/22. Will it bring a long overdue correction, or also invert?
Projections: "After some additional consolidation, the SPX looks as if it means to reach 1522 after all before correcting." Last week, SPX reached 1524, sold off to the nearest support level, and re-tested the 1524 level before pulling back again. In a strong market, overshooting the projection by a couple of points is normal, but if SPX clears that level with strong support from the A/Ds, It will have the potential or reaching 1532-1535, and perhaps 10 points higher before correcting. Breaking below 1414 with appropriate weakness in the A/Ds would negate that potential and would probably result in the successful challenge of the 1495 support level.
Structure: T"he short-term structure supports a high in the vicinity of 1522. This will be confirmed when a reversal takes place from that level." We are still waiting for confirmation.
Sentiment: VIX made a fractional new low this past week. While it broke its former low by only .05, this nullified the positive divergence which had been building up and could suggest that it has more work to do before a significant reversal takes place. Reversals in the SPX without even the most minute show of positive divergence in the VIX is extremely rare. Perhaps this will be one of those exceptions.
Indicators: As of Friday's close, hourly momentum indicators had not given a sell signal and the SRSI was oversold, which could be a condition for a higher high to come. Some positive divergence in the A/D also suggests the same thing. However, considering that Friday was a combination of options expiration with a three-day holiday ahead, short-term statistics could have been distorted and require substantiation from Tuesday's market action.
As of Friday, the daily indicators continue to show negative divergence but have yet to give a sell signal.
Chart Analysis
I am, once again, comparing the action of the SPX to that of the Russell 2000 (charts courtesy of Q charts). Looking at the price action, SPX made a new high last Wednesday and was unable to go beyond over the next two days. By contrast, Russell 2000 surpassed its Wednesday high on Thursday and made another new high on Friday. Since Russell tends to lead SPX, this relative strength in the former may be a warning that the latter could still rise to new highs next week. On the other hand, options expiration may be responsible for this action which, in that case, would render it meaningless.
There is also the fact that IWM had a P&F phase count to 92 which was finally filled on Friday toward the end of the day, followed by an immediate pull-back. True, the pull-back quickly found support, resulting in insignificant weakness but, again, expiring options could have been a factor.
Certainly, the wide-spread divergence existing in all the indicators of both indices is suggesting that a market correction is overdue and could come at any time. This is especially apparent in the breadth indicators which are ready to give a sell signal at an instant's notice.
The next set of charts gives us an interesting perspective of the relationship between several indices, indicators, and breadth (these also courtesy of Q charts). At the top: hourly charts of XIV, SPX and Russell. At the bottom: VIX, NYSE A/D, and VXN.
Since the bullish divergence took place on Friday, it is possible that this was only an aberration caused by options expiration, and it will be up to Tuesday's market action to provide clarification.
What we have in the top charts is the SPX being depicted as weaker than XIV and Russell 2000 over the near-term. Normally, at a top one would expect the very opposite.
At the bottom, VIX and VXN both made new lows last week, whereby at a market top, one would expect them to show positive divergence. Note that the relative weakness of the SPX shows up best in the MACD, although none of the three have turned negative, yet. Also, of the three, the SPX SRSI is the most oversold and the most ready to reverse. We'll find out next week if all this means anything, but the whole idea of analysis is to look for warning signs and these may signal that we are not quite through!
Cycles
Inverting cycles -- the most important of which is the 36-wk cycle due to make a top in this time frame -- should produce a top, and if the 7-wk cycle makes a low, we should have a decline into the end of next week.
Breadth
The McClellan Oscillator and Summation Index (courtesy of StockCharts.com) are posted below.
The NYMO is clearly tired and wants to correct. It is sitting out the rest of the climb and telling the market: "You go ahead! I'll wait here until you're ready to come back down". The same sideways action is taking place in the NYSI. Up from here does not seem to be a viable option. Down is a much better one.
Sentiment Indicators
The SentimenTrader (courtesy of same) shows no change from last week. No new clues! We'll pass.
VIX
On Friday, VIX made a fractional new low while SPX did not make a new high. If I were to interpret this literally, I would have to say that this suggests that SPX still has a little higher to go. As I mentioned earlier, it is extremely rare for SPX to end an uptrend while VIX is dropping to a new low.
Granted, the new low was only by five cents and it did reverse immediately. Friday was options expiration day which could have caused abnormal behavior, but since similar warnings were given by XIV, Russell 2000 and XBD, along with positive divergence in the raw hourly A/Ds, why don't we wait and see what next week brings before declaring that SPX's return to 1524 for the second time was a successful test of the high.
XLF (Financial SPDR)
XLF continues to trade in sync with SPX. It will have to show some relative weakness in order to forecast a reversal.
BONDS
TLT is the inverse image of SPX and appears to be forming a base while SPX looks as if it is forming a top. Until it breaks above the red downtrend line and overcomes 117.60, TLT cannot declare a reversal. When it does, it is probable that SPX will be doing the same thing in reverse.
GLD (ETF for gold)
GLD has dropped past the suggested 157 phase projection and may be finding support at 155, but it is possible that it will reach about 151 before completing its near-term decline. That would put it very close to the last two intermediate lows around 149 and begin to suggest that the long-term structure is evolving into a large rectangle, as I had suggested it might some time ago. Since this could either be wave "d" or "e" of this potential triangle, we'll need to wait and see which way the confirming trend breaks. If it's up, there is a possibility that GLD would be on its way to a new high. Down would suggest that the long-term consolidation is not complete and that the index could drop another 22 points below 149 (the width of the triangle).
This is only early speculation about what GLD may be doing. It will require confirmation, and this will require time.
UUP (dollar ETF)
UUP has found support at about 21.60 four times now. Yet, it cannot be said decisively whether it is resuming its uptrend, or if it will need to retest the support level. If it is to resume its uptrend, it will have to overcome the former high of 22.05 (it reached 22.00 on Friday) which is also the current level of its 200-DMA. After a near-term rally from 21.53, it may be too much to ask for it to accomplish this without first consolidating. Another minor pull-back would complete a favorable bottoming pattern.
Ultimately, UUP is still dependent on the euro and will need its cooperation if it is to resume its uptrend.
USO (United States Oil Fund)
"Mostly, USO appears to be moving in tandem with the stock market and should correct when SPX starts to correct." Indeed, USO has made the same double-top pattern that has been created by SPX, except that it did not bounce at the end of the day. Since the immediate future of SPX is opaque, we will also have to wait and see if USO is ready to reverse decisively from this level or if more work at the top needs to be done.
Summary
SPX has validated its projection to about 1522. It has now formed what looks like a double-top which, according to the P&F chart, gives it the potential to decline to about 1475 - if it is ready to reverse and does not make a new high first.
Some (minor) near-term positive divergences occurred in a number of leading and confirming indicators on Friday (which may have been the result of options expiration prior to a 3-day weekend) creating some doubt about an immediate reversal. Clarification of the index's intention should take place on Tuesday.
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