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. However, the severe correction of 2007-2009 may have curtailed the full downward pressure potential of the 120-yr cycle.
Intermediate trend - The uptrend from 1343 may have a little farther to go before topping.
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.
FINAL PUSH INTO RALLY TOP?
The correction from 1530 was brief, volatile, and may be over. The first leg down lasted two days and took SPX to 1497 where it found support and staged a two-day rally to 1525. Another two-day down-leg drove the index to 1485 and, over the next two days, prices returned to 1525. On Friday, the pattern changed! There was another 24-point decline, but SPX immediately retraced nearly all of the lost ground from 1525 and closed up three points for the day.
Trying to follow these gyrating prices in writing is probably meaningless, but when you see the price pattern on a chart, it looks very much as if the SPX action of the last 8 days has created a reverse H&S formation. The neckline would be drawn across the two 1525 tops and if, over the next couple of days, SPX manages to rise above, it will have validated the pattern. This would be bullish and would probably confirm the start of the final wave from 1343.
As I mentioned before, the EW analysts are divided into two camps: the first see a large bearish wedge pattern which portends a severe decline ahead, while the second group is looking for one more wave (wave 5) from 1343 to complete an impulse pattern. If SPX can trade above 1525 decisively over the next few days, those who are looking for the completion of a five wave pattern will most likely turn out to be right.
Friday left matters unsettled! While SPX closed well, both for the day and for the week, and near the top of each respective range, it was not quite enough to give a buy signal, suggesting that more work on the right shoulder may still need to be done, or that the pattern could fail completely. It will be up to the next few trading days to decide. Some of the leading and confirming indicators are beginning to underperform the SPX warning that, whether or not that index makes a new high, the rally from 1343 appears ready to end.
SPX 1495 continues to be the primary support level. It was penetrated once, but the index made a nice recovery. The next time it is tested, the bulls may not be so lucky!
We'll stick to our comparison of Russell 2000 and SPX (daily charts courtesy of QCharts) which is beginning to prove the point that IWM is a leading indicator.
I have marked the two previous tops on the charts points "a" and "b". As you can see, there is no real difference between the two indices. Both made new highs at those points, and both corrected. Now, let's look at the correction. SPX broke below an important support level, but IWM remained above its comparable level. This suggested a false break in SPX and sure enough, the index rallied nicely from that low. I have marked the top of that rally point "c". Now look at point "c" in the IWM chart. The latter has not rallied as much as SPX did, and this could be a yellow flag for the market. If IWM fails to catch up with SPX over the next few days (whether or not the indices make new highs), the flag will turn red, and it will be time to look for the uptrend from 1343 to end!
The indicators only show that the market has stabilized after the short price correction. They have not yet given a buy signal, but odds favor that they will - however briefly -- allowing the SPX to join the DOW at a new rally high. Leading indicators normally give advance warning that a reversal is coming, but It does not have to be imminent. Also, the indices have created a potential inverse H&S pattern - a bullish pattern which, if confirmed, suggests that another up-phase is likely.
Instead of showing an hourly chart of SPX, I am showing one of the DJIA, because it tends to lead the market and has already made a new high. We can probably assume that, as long as it is outperforming the other indices, the uptrend is still valid. Those EW analysts who were looking for a fifth wave in the uptrend from 1343 have already been vindicated. Now they must decide if only wave one has been completed, or if "1" is actually "5". They should not have too long to wait. If DJIA makes a new high over the next few days and SPX rises beyond 1530, we can assume that the rally has more to go before reversing.
The indicators are not showing any negative divergence, yet. This gives an edge to the bulls.
The 7-wk and 36-wk cycles were both responsible for the correction and appear to have made their lows and caused near-term reversal.
A number of cycles are due to bottom between now and June/July, starting with the 11-wk cycle in about 3 weeks and culminating with the1-yr cycle. It would not be surprising to see a correction extending into that time frame after this rally is over.
The McClellan Oscillator and Summation Index (courtesy of StockCharts.com) are posted below.
NYMO has rallied from the correction low but is still negative. If it turns positive, it should give a buy signal to the SPX and most likely preface a new high. If it subsequently turns down before NYSI has made a new high (thereby causing it to turn down), it would signal the end of the rally and the beginning of an important market correction.
The SentimenTrader (courtesy of same) has gone back to a perfectly neutral position. This is not an indication that the market has topped.
XIV (reverse VIX)
XIV moves in the same direction as the market instead of against it. It is another prime leading index, as are most of those charted below. Like VIX, divergence with SPX indicates that a reversal is near except that, with XIV, it is more clear.
In the last couple of days, XIV has strongly underperformed SPX and thus issued a warning that the rally may be coming to an end. If the divergence gap is not closed over the next few days and XIV continues to weaken, it will be another sign for the bulls that caution is warranted.
XLF (Financial SPDR)
For many weeks XLF remained "in sync" with SPX, giving the impression that it was worthless as a leading indicator, but it is about to prove its value. During the recent correction, XLF broke its support level "in sync" with SPX. However, on its rally from the low, XLF has started to underperform. If this continues, it will be another red flag announcing an approaching reversal.
TLT has found support away from the bottom of its channel which is a sign of strength or, at least, resistance to a decline normally preceding a change of trend. It probably intimates that, after a little more consolidation, TLT will be able to challenge its top channel line and start another rally within a longer downtrend.
GLD (ETF for gold)
The week before last saw GLD decline in a short-term free fall which took it outside of its declining channel. That, and the fact that it was the third phase of a downtrend which started at 174, gave it the appearance of a climactic move which could bring its correction to a halt, temporarily. GLD has had a good bounce but it may drop a little lower before reaching important support.
Gold has weakened along with other commodities as the dollar staged a strong rally. The dollar should soon be entitled to a rest, which should allow GLD to consolidate, but since the dollar may be starting a significant uptrend, it is likely that, at some point, GLD will be vulnerable to breaking the 149 support level and extend its long-term decline to 141 or even lower.
UUP (dollar ETF)
After creating an important base which was completed in August 2011, UUP engaged in asignificant uptrend (actually, a rally in a long-term downtrend) which came to an end in July 2012. Since the base has a higher count, this move was most likely only the first phase. UUP has now started on the second phase of a long-term uptrend which should excede the top of the first, but remain corrective in nature.
The short-term is overbought and should soon be ripe for a pull-back, but the base that was created around 21.60 is large enough to carry prices higher. This will give gold and other commodities time to catch their breath in preparation for their next likely dunk.
USO (United States Oil Fund)
Being a commodity, oil has also been affected by the strength in the dollar. It tried to hold on to the outside of the broken downtrend line but could not, and went on to close the gap which was mentioned earlier as a possible target for this move.
Dropping back below a recently broken downtrend line - especially one of this duration - is a sign of weakness, and it is likely that, like other commodities, USO will be seeing lower prices as the dollar continues to strengthen. Any pause in the downtrend should be just that, a short-term consolidation which should only be temporary.
The short-term top which was forecast for SPX in the last newsletter led to a brief 44-point dip which only lasted 4 days and failed to reach the anticipated downside projection of 1465-1470. Since then, the index has retraced three/fourths of its decline and, in the process, may have created an inverse H&S pattern which, if valid, should lead to a new high and what will probably be the end of the move which started at 1343.
Some short-term positives are calling for a potential all-time high in the Dow Jones Industrials which, on Thursday, came within 50 points from the top achieved in October 2007. On the other hand, if the H&S pattern turns out to be invalid and short-term weakness returns, the initial downside projection for the correction could still be reached before another attempt is made at making a new high.
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