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
Market Overview
The heading of this letter "FINAL PUSH INTO RALLY TOP" only refers to the rally which started in the SPX on 11/16/12 at 1343. It by no means implies that this will be the top of the bull market that started in March 2009 and which, in my estimation, has much more to go in both price and time.
This past week, the majority of the principal U.S. averages made new bull market highs, including the Dow industrials and transportation indices which made all-time highs, as well as the Russell 2000 and the S&P 500 equal weight average (RSP). If that is not enough to make you agree that we are still in a strong bull market, the Dow Theory confirmation should be the icing on the cake.
Since I am a cycle follower, I must admit that I did not expect the market to be in this position this far into the 120-yr phase of the Kress cycle and its major components, all due to bottom in 2014, and which should be exerting strong downward pressure by this time. Kress believed (he passed away recently) that cycle lows come exactly when due and do not invert. Therefore, if he was correct, there should still be a serious bear market starting(???) which would end in October 2014, perhaps something similar to the 2007-2009 decline which lasted about 14 months. When we approach the top, warnings should become apparent and, since they are nowhere to be seen at this time, let's concern ourselves with the current rally. I have, at least what I consider two good reasons to believe not only that we are in the final phase of the rally which started at SPX 1343, but that it has farther to go before it ends: the first is that I agree with the bullish EW clan which believes that we are in the incomplete fifth wave of the impulse that started at 1343; and my P&F and Fibonacci projections have not yet reached their targets. We'll see!
Chart Analysis
The week before last, RUT started to lag the DOW and SPX, bringing into question whether we were in the process of building a top. Last week's action, shown on the charts below (courtesy of QCharts), with both DOW and Russell making all-time highs, erased such a possibility. Instead, the EW bulls are happy to see the structure evolve as they expected to complete the move from 1343. Accordingly, we should now be in wave 3 of 5, and this promises higher highs ahead under the EW theory. My P&F work also confirms this scenario.
It is true that the momentum indicators are beginning to show some negative divergence, but that would be expected in the last phase of a rally and, as long as they are still moving up, it could be some time before they signal an imminent reversal.
Also, as we will see later, there is no imminent warning from the sentiment and other leading indicators.
The analysis of the hourly charts (also courtesy of QCharts) reveals some possibly more urgent concern over the near-term. A P&F count was filled at 1551 and provoked an immediate pull-back of 8 points in the first hour on Friday. The SPX then crawled its way back up to the high of the day and slightly beyond, closing near the high.
Next week will determine if we keep up the crawling pattern -- as we did in the last move to 1530. This pattern continued for several days in spite of the negative divergence which had formed in the indicators. We know that this is only a warning sign. The sell signal has to come from the price action itself. In the SPX especially, there is only slight price deceleration. The beginning of wave 5 started well above the lower channel line, indicating acceleration in the uptrend was taking place. And now, the index has reached the top of the channel but has yet to be repelled by it.
The first correction will come when the MAs and the steepest trend line are broken and, unless the lower trend line of the small channel is penetrated, only a minor pull-back should materialize followed by new highs. After that happens, we can estimate where we are in the structure and whether or not we are anywhere close to the top.
Cycles
Wave 4 was caused by the bottoming action of the 36-wk cycle. A 29-d cycle is due about 3/21 and a 7-wk cycle in the first week of April. Let's see what effect these will have on the index and its structure.
Breadth
The McClellan Oscillator and Summation Index (courtesy of StockCharts.com) are posted below. The McClellan oscillator reversed course and has gone positive. It is not displaying a great deal of strength, but it was enough to turn the NYSI upward and back just above mid-range. Its RSI turned up before it got below 30, and has also climbed back above mid-point.
As long as McClellan remains positive, NYSI should remain in an uptrend and so should the market. When it turns down, it may be a sign that the indices have reached their upward limits and are reversing. An initial, mild warning could be for wave 4, with a stronger one after wave 5.
Sentiment Indicators
This week, the long-term indicator of The SentimenTrader (courtesy of same) has remained in a perfectly neutral position. I interpret this as a sign that the indices have still not reached the rally top.
VIX
As long as VIX continues to decline, it's a pretty safe bet that we have not seen the top of the rally. This index shows clearly the bottom of the 4th wave (represented by a high on February 26), and consecutive declines as the indices moved to new highs.
At the high of wave 3, clear divergence showed on the VIX itself, since it barely penetrated its previous low, but that divergence showed much more clearly on the indicator below. A similar pattern could develop as wave 5 comes to an end. It is possible that VIX will make a new low first, possibly to 13, and perhaps even to 11.
XLF (Financial SPDR)
Like the Russell 2000, XLF started to show some divergence early, with the same potential significance. However, last week the financial index caught up with SPX and got back in sync. That means that any inference that we have reached the top of the move has been nullified. Instead, XLF is now assuring us that there are higher targets ahead.
I have labeled the uptrend and we can see that it closely matches the SPX.
The indicator is overbought, but it shows no sign of negative divergence, suggesting that XLF still might have a little more room before it gets to the top of 3 (of 5).
The P&F chart gives XLF a potential target of 19-19.50. This is where we might look for the top of "5".
BONDS
In my daily updates, I have suggested that TLT might reach about 115. That has already been reached. Considering the possibility that SPX still has more to go on the upside and that this could take a week or more, TLT could still drop by another point or two before it finds terra firma.
GLD (ETF for gold)
GLD has been in a major consolidation pattern ever since it reached what could still be an "intermediate" top in September 2011. The main question is: "When will it complete its current corrective pattern and be ready to move to its potential long-term top of about 230 which is predicted by the P&F chart?" Perhaps not until it corrects at least .382 of its former uptrend. That would bring it down to about 142 and take several more weeks. A retracement of .50 (127) or .618 (114) would take even longer.
It's conceivable that GLD will hold at its current major support level, form a substantial base, and start its rise to the 233 top from here, but even getting ready for that move would take some time. Important lows appear to have been made, like clock-work, in conjunction with the 25-wk cycle, and the next one is still about 14 weeks away. Assuming that it holds above 149 during this phase, it would give GLD enough time to build a base large enough to move out of its minor down-channel and challenge the major one. But if it breaks below that support level by the time it makes its next low, the lower projections would come into play.
Another cycle which appears to control the price of GLD is the 9-wk cycle whose low is due around this time, and may have bottomed last week. This would give GLD the opportunity to rally for about 3 or 4 weeks. To break out of its current downtrend, it would have to rise above 164. It does not have a large enough base to go beyond 160 at this time, but it could add to its base before moving up. Let's see what it does over the next week or two.
UUP (dollar ETF)
If you have doubt about gold and the dollar moving in opposite directions, this chart should dissuade you of such notion. The same cycles that apply to gold essentially apply to the dollar, but in reverse.
If the dollar is at the beginning of a strong uptrend, then it does not bode well for GLD holding its 149 support level. Already, GLD is trading below its last 25-wk cycle low which occurred in December.
The best forecast for the near future is probably the P&F chart for UUP (currently 22.56). It has met a short-term projection and should correct a little, but the entire base recently created calls for a move to 23.50. If realized, it could send GLD below 149.
USO (United States Oil Fund)
The correlation between the dollar (red line) and oil is not as exact as it is with gold, but it is there nevertheless, and the same diagnosis should be made for oil. After a brief rally, USO will most likely complete the "e" wave of a triangle pattern (blue) and be ready for another decline to its long-standing projection of 29.
Summary
The bullish inverse H&S pattern which appeared in the SPX recently has been validated by the break-out to new highs.
The structure which is being formed appears to fit a wave 5 scenario to a "T" (an "EW"?). If that's what it is, then we have yet to see a high until it is complete. This is substantiated by indicators and potential higher projections. We need to follow these technical directives until otherwise indicated.
Be aware, however, that a wave "5" (in this case from 1343) is normally followed by a relatively substantial correction. Hence, the heading: "FINAL PUSH INTO RALLY TOP".
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