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Market Turning Points

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 in their down phases, and if they make their lows when expected (after this bull market is over), there will be another steep decline into late 2014. However, the severe correction of 2007-2009 may have curtailed the full downward pressure potential of the 40-yr and 120-yr cycles.

Intermediate trend - The uptrend from 1343 may have just 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.

Daily market analysis of the short term trend is reserved for subscribers. If you would like to sign up for a FREE 4-week trial period of daily comments, please let me know at ajg@cybertrails.com.


Market Overview

After the DOW industrials made an all-time high recently, it was widely predicted that SPX would soon follow. Indeed, it closed at a new high on Thursday, four points over its 2007 close. It did not make it past the intra-day high of 1576.09 which was reached in October 2007, but that record will probably also fall before too long.

Several weeks ago I gave two potential targets for the uptrend which started at 1343. The first (1571) was most likely reached in the last hour of trading on Thursday when the SPX traded at 1570.28. The other is only a few points higher and could still be attained before a good correction sets in. It will depend on how the index initially retraces from this high. 1552 will be the first critical level that must hold if we are to go fetch the second projection. If SPX drops below, the odds that we have already started a correction will greatly increase.

How do we know that we are reaching the end of the rally? Besides reaching the Point & Figure projection which first established when the rally went past 1445 and re-confirmed at the 1515 level, deterioration has been increasing in the daily indicators for the past two weeks, especially in the breadth oscillator. I also mentioned in the last letter that we were in the process of completing wave 5 from 1343. For the SPX, the final push has come in the form of an ending diagonal which started on 3/19 and which is very visible on the charts. But it is unclear if there will still be one more small wave higher after a 10 to 12 point retracement, since there is an alternative projection to a slightly higher level. There is enough uncertainty to hold off making a conclusive forecast that the top has already been made.

And after we do have the top in place, how much of a retracement should we get? The exact level will be reserved for subscribers, but I do not expect this to be a major correction. Only a normal pull-back in an ongoing bull market.

Incidentally, I received a number of comments from traders who are discouraged by the market action stating that the Fed and its monetary policy had rendered the stock market unpredictable and technical analysis useless. Nothing could be farther from the truth! All you have to do is look at a long-term chart and you will find that the market is making exactly the same patterns today as it did twenty, fifty or one hundred years ago. The Fed's influence has slightly altered the supply/demand equation, but it has not eliminated it; it has somewhat altered cycle phases but not eradicated them; and it has not prevented price action from making P&F patterns from which one can draw accurate projections. In reality, very little has changed!

Chart Analysis

Let's go back to comparing the SPX to Russell 2000, but we'll do it by looking at hourly charts (courtesy of QCharts).

Russell 2000 Index and S&P500 Index Chart
Larger Image

As the rally progressed and approached the target set for the top, I looked for confirmation by observing some leading indexes. There are several indices which tend to warn of an approaching top. The Russell 2000 is one of them. These charts show you the increasing relative weakness of IWM to SPX over the past two weeks. On Thursday, this warning even culminated with a last minute sell-off in Russell as we touched the SPX target zone.

Significant price deceleration is evident in both indices, taking the form of a triangle in the Russell and an ending diagonal in SPX. Both the price patterns and the indicators warn of the need for a correction which, because of the remaining higher projection, could be of a limited nature and followed by one more thrust. On 3/15, IWM came within a fraction of satisfying its 95-95.50 projection. It may still attempt to fulfill it with a final rally.

Next, we'll look at the daily chart of the SPX (also courtesy of QCharts) which reveals a great deal about the market condition, both short-term and intermediate term.

Let's analyze the price action itself, starting with the uptrend which originated at 1343. It's not often that you find a trend which shows, as it does here, both acceleration and deceleration in the same phase. I have connected the lows of each correction in the uptrend with a trend line. The first is a purple trend line. The second, a green trend line which rises at a steeper angle -- meaning that the trend is accelerating. The third is a blue trend line, which shows even more acceleration.

But that's not the whole picture! If we connect the tops, we notice that after the second wave ended, a deceleration process started to take place, indicating increasing selling pressure. These two converging patterns have resulted in a wedge formation which, as we know, is a warning that the trend may be coming to an end. From this pattern, we can also deduce that the correction - when it comes -- will be fairly mild. In fact, a good retracement level would be that from which the wedge formation started. After this correction SPX should be followed by a rise to its next projection level.

S&P500 Index Chart
Larger Image


I have already discussed the potential for a low into late June/July as a result of the yearly cycle which normally bottoms every year in that time frame. There is also a pattern which has existed since the beginning of the bull market and which has caused the top of this cycle phase to come in April - that is, next month! Everything -- from market behavior, indicator patterns, structure, and the reaching of the projection target -- is suggesting that this pattern will repeat itself again this year.

In addition there is a very regular 7-wk cycle (whose lows I have identified on the above chart) which is scheduled to bottom around the middle of next month. This is what I meant last week when I said that this was a very predictable market.


The McClellan Oscillator and Summation Index (courtesy of StockCharts.com) are posted below.

It seems that the McClellan oscillator is getting weaker and weaker as the market moves higher and higher. That is the typical behavior of this indicator as the market approaches a top. The last attempt barely managed to bring it up into positive territory, but it was too weak to turn the Summation Index which simply moved sideways.

Just one day of significant negativity in the A/D will be sufficient to turn the NYMO down again and probably continue its decline. This could happen as early as Monday.

NYSE McClellan Oscillator Chart

NYSE Summation Index Chart

Sentiment Indicators

The SentimenTrader (courtesy of same) is in the same position as it was last week. This is another indicator that is telling us that, although we are most likely coming into a short-term top, we should not expect a major correction when the market does pull back. The long-term indicator will have to get towards the top of the dark red to give us a severe decline warning.

Sentiment Chart


Thanks, once again, to QCharts, we can see that VIX compared to SPX gives us the same warning as the Russell. VIX made a low ten trading days ago at 11.05 and stayed above 12 on each subsequent pull-back as SPX was moving higher. On Thursday, VIX closed at 12.70 as SPX was closing at 1569.19. That kind of diverging action only happens when a reversal in SPX is imminent.

VIX Chart
Larger Image

XLF (Financial SPDR)

I have often stated that the reason I charted XLF was because it would start to diverge from SPX when the latter was close to a top. Well, this time has arrived! Like Russell and VIX, it is showing the same tendency to diverge from SPX. Look at where XLF (green) was on 3/15 in relation to SPX (red), and where it is now!

XLF Hourly Chart
Larger Image


And, for good measure, the diverging indices include TLT whose behavior, at tops, is similar to that of VIX. TLT made a low at 114.60 on 3/08 finding support just above its long-term (green) uptrend line and Thursday, as SPX closed at a new high, it almost reached 19.00 instead of pulling back.

TLT Daily Chart
Larger Image

GLD (ETF for gold)

GLD stopped its decline just above its major support level of 149 and is trying to rally back up to 159-160, but it must get past 157 to do this and time is running out. If it has not done this in the next week or so, there is a good chance that it won't, and then the moment of truth will have arrived! Will it be able to hold the 149 level which has, so far, served as a floor for its long-term correction? There are some valid counts down to 141-143 which argue against it; and since GLD broke decisively below its last 25-wk cycle low almost as soon as it was made (and it is now past the half-way mark to the next low), it is getting more and more likely that 149 will not hold.

RGold ETF Daily Chart
Larger Image

UUP (dollar ETF)

UUP continues to exhibit some strength and seems unable to undergo even a decent short-term correction, managing only a pause in its uptrend. However, that may not last! The indicator shows that it is getting more and more susceptible to a pull-back -- though that could be more in the nature of a sideways pattern rather than some significant retracement. Longer-term, it has created enough of a base to move up to 23.50 before ending this rally phase.

Dollar ETF DailyChart
Larger Image

USO (United States Oil Fund)

If my assumption that USO is making a triangle pattern is correct, having now risen to former resistance, it should now be completing the e-wave of the formation. To validate this assumption, USO must now turn down shortly, and if it does, it will risk extending the downtrend which started at 42 and which has a potential target of about 29.

United States Oil Fund Daily Chart
Larger Image


On Thursday, SPX reached one of two potential rally targets. These are fairly close to each other and either one could end the uptrend from 1343 and bring about the first significant correction since it started.

As I have shown in this letter, there is plenty of evidence that the current market phase is coming to an end. We'll leave it up to the market to determine the exact timing.



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