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.
REACHING A SECONDARY TOP
Market Overview
While EW analysis has its limitations, it does help to clarify the market position by labeling the market phases. The heading "REACHING A SECONDARY TOP" refers to the high probability that we are very near the price target that was determined for wave 3 (of 5) for the trend which started at SPX 1343. If correct, a retracement is due (wave 4 of 5), which would precede a final move into the primary top and the end of the 4-month rally. If the primary top (wave 5 of 5) should come next month, it would be the 4th consecutive April to end an intermediate trend since the beginning of the bull market.
As we will see, the loss of momentum which precedes a reversal is very apparent in both daily and hourly indicators. This means that our price target should be accurate and, if not reached exactly, will only miss by one or two points. This price projection was established with the help of the P&F chart after the completion of the correction to the 1485 level, and it is being confirmed by recent market action.
Warning also comes from the leading indicators which are nearing their targets, as well as the SentimenTrader which has made the deepest penetration into the red zone since the February top.
The question arises as to whether this will be a reversal for the entire rally, or just a preliminary one as stated above. EW experts generally agree that we have not reached the end of the run just yet, and that another minor phase higher will come after this correction. I don't have any reason to disagree with this prognosis. My analysis comes to the same conclusion.
Chart Analysis
The daily SPX chart below (courtesy QCharts) shows the unrelenting upside progress of the SPX for the past four months. Trying to mimic the Dow Industrials which recently made an all-time high, the index has come within a few points of its 2007 high and is expected to go over the line before this rally is over.
I have drawn a sketch of how I believe it will end: a little higher high for now followed by a slight dip, and on to the end of the rally and a new high. After that pattern is complete, a correction which may approximate the one which started in November of last year, with emphasis on "may" because it is not likely that the bull market is near its top. Mostly, it will depend on whether we are only correcting the move which started at 1343, or correcting the one which started at 1075.
That analysis is for another day. Let's look at the indicators and see why the rally is coming to an end. To begin, we note that there is divergence now showing in all three, with the greatest disparity with price in the A/D. That's where incoming weakness (and strength) first appears. Not only did it fail to make a new high, but it is ready to go negative. The momentum indicators also failed to rise above their former peaks, but they are still very positive and this is why the above suggested ending pattern is likely. They should first dip towards the zero line, rally, and then go negative. That, or something similar, with the sell signal given when SPX breaks its trend line.
The main reason why the bull market does not seem close to topping is because SPX has now risen 250+ points above its long-term trend line which connects the 2009 low with the 10/11 low. Before challenging that trend line, the index will first have to break its trend line from 1343 (green) then the one from 1075 (blue) before it can even reach the long-term trend line. Clearly, this is still months away! The permabears who call for an end to the bull market now should use a little bit of technical logic!
The next charts, (also courtesy of QCharts) show the hourly SPX with an hourly A/D oscillator below. Here, we see that the price is still in an uptrend, still making higher highs and lows, and remaining above the MAs. The crawling upward pattern is very similar to that in the previous phase, and it may end the same way with a little climactic push to a new high (our target) and an immediate retracement breaking the previous short-term low.
Indicators always show the deceleration process better than the price -- primarily through negative divergence. Here also, it abounds and has even caused the bottom two indicators to go negative. But if the analysis is correct, they will briefly become positive again before turning down one more time to give a minor sell signal (which would be wave 4 of 5). Wave 4 (of 3) was so shallow that it barely broke below a previous low before turning up and, consequently, was difficult to spot. Because the trend is more advanced, this wave 4 (of 5) should result in a little more profit taking, but we do not need to second-guess it since our point & figure chart should give us the extent of the correction after the top has been made. (It has already determined the probable target for the final rally high)
Cycles
A well-known cycle analyst recently asked if the FED had, through its prolonged easy credit policy, rendered cycles useless? There is no question that it has had some effect in reducing their effectiveness, but those that have been practically eradicated are the shorter-term cycles. Those with longer phases are still very noticeable, although their punch is not what it used to be. The two recent corrections of this market phase (from 1343) were in line with the 66-wk cycle and the 36-wk cycle. The 1343 low was caused by a cluster of cycles which included the 29-30wk cycle. That cycle is scheduled to make its next low at the beginning of June, along with two more important cycles.
Earlier, I mentioned that since the beginning of the bull market, the month of April had brought about an intermediate high. The timing for another high next month is just about right, and a decline into late May early June would be just about the right amount of time to correct a four+ month uptrend.
Breadth
The McClellan Oscillator and Summation Index (courtesy of StockCharts.com) are posted below. The MYMO looks almost exactly like my daily A/D indicator. By remaining slightly positive, it is allowing the Summation Index to remain in a weak uptrend which, now that SPX has made a new high, has joined the McClellan oscillator in displaying negative divergence. Here also, we have a warning that the rally is approaching the end.
Sentiment Indicators
There has been a significant change in the position of the long-term indicator of The SentimenTrader (courtesy of same). For the first time in six weeks, it has moved decisively into the overly optimistic camp. This is another warning which I expect will become even more flagrant over the next couple of weeks.
VIX
From the last letter: "As long as VIX continues to decline, it's a pretty safe bet that we have not seen the top of the rally." Last week, it made another low!
Furthermore, VIX needs another half point to a point on the downside to complete its near-term target. Odds that this will happen is that even the indicator made a new low and does not yet show positive divergence. I expect this to take place next week, after which, VIX should bounce as the market pulls back.
XLF (Financial SPDR)
XLF continues to keep pace with SPX. I do not expect a top to be in place until it exhibits some relative weakness to SPX.
BONDS
Currently, there is not much interest in TLT. It continues to correct, has just about reached its projection level, and may be starting to build a base from which it can escape from the steepest short-term channel. But it will run into problems at the downtrend line of the larger one. For the next few days, holding at the current support level while base-building will be its main occupation.
GLD (ETF for gold)
There is some similarity between GLD and TLT. Both charts show that the two indices have started major consolidations -- if not long-term downtrends. GLD is a little ahead and has already built a small base which could take it to 1159-1160 if it can break out of its minor channel. When reaching that level it would encounter the trend line from a larger channel as well as previous support turned resistance. In spite of all the calls from the gold bugs that it is ready to resume its long-term uptrend, it shows no evidence of such intention at this time.
UUP (dollar ETF)
UUP's recent surge may suggest that it has resumed its long-term, upward, laborious crawl within the channel drawn on the chart. The base that it formed prior to its break-out is a two-phase affair which should lead to a temporary consolidation, later followed by the second phase which gives it a price projection of 23.30. That would put it near the top of the channel and engender a longer consolidation similar to one of the previous patterns which show on the left of the chart.
Eventually, UUP could get back up to about 25.00+, which is the base projection established in 2011.
USO (United States Oil Fund)
USO appears to be in a major consolidation formation. If it is a triangle, after one more little move up (which has already started) it will have completed the last (e) wave of that formation and it will be ready to resume its downtrend which, according to the P&F chart, could take it down to 29 (for a start), with a longer-term potential of 23 if it cannot hold the 29 level.
Summary
SPX continues to behave as expected and has almost reached the anticipated price projection for wave 3 (of 5 from 1343). Upon completion - which could come early next week - a short correction should ensue and be followed by the final wave of the move which started almost exactly four months ago.
We'll take up the final topping action in the next newsletter.
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