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 - SPX continues to progress according to its structure. If the count is correct, an intermediate reversal could be on the way, but this may also be only a short-term reversal followed by new highs.
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.
CORRECTION IN PROGRESSS
Market Overview
Last Wednesday, the SPX had a mini-climactic move to 1687 which ended as a key reversal day. It then went lower the next day, met a phase P&F correction at 1636 (51 points in two days) and bounced. On Friday, a test of that low was followed by another bounce. Buying the dips is fairly typical at the beginning of a long-overdue correction, and this is probably what took place over the past two days. It does not appear, however, that the correction has already ended. Let's see where we are:
Structure: With the nature of the decline, this has become a little ambiguous. We were expecting a minute wave iv, but the correction has already stretched its parameters and if we go lower - as I expect - it may force us to consider something of a larger degree. Let's see how things develop.
Cycles: It looks as if the cycles which I had expected to bottom in early June have begun to exert pressure on price. If my assessment is correct, the correction should continue into that time frame.
P&F projection: Over the past few weeks, it has been difficult to come up with a valid top projection.
Each one was met and immediately exceeded. This is a good example of why using methodologies which complement one another is the best approach to get an accurate read of the market. On the downside, however, the projections are still working just fine. The initial drop to 1636 was right on the money and brought about a good bounce. The next ones will be passed on to subscribers.
Support zone: The first support coincided with the first projection. There are additional support zones which also coincide with lower projections and which will be identified as the index is ready to drop to their levels.
Sentiment: Sentiment figures rose just enough to let us know that a top was imminent. They should now back off into a buy zone by the time the cycles make their lows and the SPX meets its final corrective projection.
Chart Analysis
This weekly chart of the SPX (courtesy of Qcharts) gives us a good feel for the condition of the long-term bull market which started in March 2009. It is alive and well, but in need of a rest which should come in two stages.
Note that prices have moved all the way up to the top of the green channel which could not delineate the long-term trend in a more perfect way. Within that green channel, there are two intermediate blue channels. The SPX is now also trading at the top of the second intermediate channel. And finally, the current short-term trend has now risen to the top of its aqua channel and backed off, breaking out of that channel. The convergence of these channel tops should provide some resistance, and this is one of the conditions to which the market is currently reacting.
However, there is no sign of deceleration in price, nor is there negative divergence in the indicators. Analyzing the patterns of the MACD histogram is instructive. Let's focus on the portions which are included between the parentheses. These represent the short-term trends just prior to an intermediate top. You can see how the green spikes of the one on the left became smaller and smaller until they finally turned negative. The patterns of the two intermediate uptrends nave similar histograms and, if this continues, the second one should remain green a few weeks longer before turning negative.
At the beginning of this analysis, I spoke of two stages which should mark the top of the intermediate trend from October 2011. We are currently in the first stage which should only bring about a limited correction. As it progresses, the histogram should continue to roll over with green spikes getting shorter and shorter. After SPX has completed its minor correction, it should start to rise toward a new all-time high. This will mark the second stage of the topping process, during which negative divergence will appear in the histogram and, when the latter breaks its up-trend line, the SPX will have reached its peak and should begin to decline into what will turn out to be an intermediate correction. This scenario would be a mere continuation of the pattern which is already in progress.
The current corrective pattern is best analyzed on the following hourly chart (also courtesy of QCharts). SPX has now broken two uptrend lines and is consolidating outside of a short-term green channel. The aforementioned cycle cluster bottoming in the first week of June should continue to pressure prices into that time frame. Two downside channels have been drawn on the chart. The index is still confined to both and, even if the first one is breached, may continue its correction within the larger grey channel. This is assuming that the decline is progressing as wave iv which should only bring about moderate weakness. If we start trading below the lower grey channel line, we may have to re-assess the structural degree and pattern formation.
There is an (unlikely) possibility that the cycles will invert and bring about the next and final top of the up-trend from 1343 without prices moving lower. In that case, wave iv would already be done and some strength should start appearing in the market as early as Tuesday.
While the hourly indicators look as if they are bottoming -- which could bring about more upside progress -- the daily indicators don't seem ready to give another buy signal.
Let's see what transpires next week.
Cycles
Several cycles identified in previous letters should make their lows in the first week of June. If so, continued pressure should bring prices down into that time frame.
Breadth
The McClellan oscillator and Summation index appear below (courtesy of StockCharts.com).
The correction has turned the A/Ds negative and this has caused the NYMO to also become negative.
Note that it has reached a level from which it normally rallies. If it does, it would suggest that the correction has been short-lived. However, the position of the longer-term summation index must be taken into consideration when analyzing the NYMO. The NYSI is just starting to come off an overbought condition and its RSI suggests that the correction is only beginning. If it were much closer to the bottom part of its range and the NYMO was at its current level, we could deduce that a new price uptrend is about to start. But it is not, and the overall picture of the two indicators is suggesting that more correction is probable.
Sentiment Indicators
The SentimenTrader continues to improve its indicator, making it easier to read the market's current sentiment level. In Friday's chart (courtesy of same ) we find the long-term index at 60 (on a scale of 0 to 100). This is one notch down from the more negative 70 where it had been for the two previous days.
Past behavior suggests that it should drop back to neutral or lower before the correction ends.
VIX
VIX has shown a remarkable lack of response to the pull-back in the averages. If the correction extends itself, it will undoubtedly react more forcefully with higher prices, but for now, its advance has been stopped by the 200-DMA
There does not seem to be too much concern on the part of traders that the retracement will extend into something major. Is there too much complacency?
XLF (Financial SPDR)
Like SPX, XLF has found resistance at the top of an intermediate term channel which coincides with a short-term channel. The indicator is still near the top of its range and suggests that there should be more of a pull-back. I have drawn a parallel which widens the short-term channel. This often denotes the level where the correction will end. XLF remains in sync with SPX and does not forecast any deep retracement ahead.
BONDS
TLT has continued to correct down to a support level which should hold it for a while, but it is not certain that it can re-bound significantly from this area, although the indicator suggests that it may be ready to do so. Recent comments by the Fed that it may be ready to scale back its stimulus program have had an effect on bonds and if, as it has been suggested, this takes place as early as June, it may keep TLT and others bonds in a longer-term corrective pattern. The 200-DMA is beginning to roll over, perhaps an indication that a long-term correction has started.
GOLD
Gold has corrected all the way down to its long-term trend line from 2005. This is a monthly chart (courtesy of StockCharts.com) which shows clearly that, although gold might bounce from -- and consolidate around -- it for a few weeks or even months, it is not in a position to have a major reversal. The MACD -- although still positive - is still declining sharply, as is the RSI. Furthermore, the RSI is not oversold and may not be for several more months.
The entire picture is long-term bearish and, until it improves significantly, gold is likely to continue its long-term downtrend. Only when deceleration takes place in the indicators and they are in a position to turn up will gold be able to attempt a reversal.
UUP (dollar ETF)
UUP continues its uptrend with occasional consolidations. It is still expected to reach a little higher level, around 23.30.
USO (United States Oil Fund)
USO is still trading within the confines of two converging trend lines, which gives the formation the appearance of a large triangle. Several attempts at moving out of it on the upside have failed and it looks as if the index is getting ready to challenge the bottom parameter once again.
Summary
After a little climactic thrust to 1687, SPX formed an outside day, which is normally a sign that the uptrend has ended and is ready to correct.
The correction has started but is not uniform, with DJIA and Russell 2000 resisting the downtrend better than SPX and NDX. Unless they join in, this could be only a short-correction followed by a final thrust to a new high before a much more severe decline begins.
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