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 May be in the process of forming an important intermediate top. Confirmation is needed.
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.
DECISION TIME
Market Overview
The last newsletter was entitled "A TIME FOR CAUTION". That warning has already been vindicated by the 25-point pull-back which took place last week. However, some follow-through will be needed to confirm that an intermediate top is in place. The Dow Industrials may already have done so, but the other indices are fighting going over the edge. NASDAQ has the strongest price pattern, but its breadth is just as bad as that of the NYSE. Since breadth tends to lead price and the DOW tends to lead other indices, it would not take much more to secure the needed confirmation.
Structure: If minor wave 5 is, in fact, complete, its pattern was unorthodox. Tony Caldaro points out that it is clearer in the DOW where it took the form of an ending diagonal triangle. If it is, it is only one of a whole string of completions: minute v, minor 4, intermediate V and major 3, and this should be followed by a very decent correction.
Breadth: As we will see later on, in turning down from a much lower level than its previous top, the NYSI has created a very strong negative divergence pattern which should give even the most ardent bulls a cause for concern.
P&F and Fibonacci projections: Should we start down from the current level, the standard EW projection after any wave 5 completion is the level of the 4th wave of lesser degree. That would mean a retracement perhaps as low as 1560. Of course, I will provide my subscribers with a much more specific - and accurate - projection once we have a confirmed reversal.
Support/resistance zones: SPX has broke minor support when it traded below 1701. The more important level of 1585 has already been tested twice with the second bounce weaker than the first. If that level is broken, only one remains at 1676. The DOW has already broken all three comparable levels.
Sentiment: the SentimenTrader long term indicator has ticked down from slightly elevated to a neutral 50. We'll examine the VIX chart a little later on.
Chart Analysis
Since I have pointed out its weakness, this week we'll analyze the Dow Industrials chart (courtesy of QChart).
At first glance, we can draw some simplistic, but valid deductions. The distance between both tops is over two months, and the second one has only exceeded the first by about 150 points. If we don't go any higher, we have created a severe deceleration pattern, which means that sellers are rapidly overtaking buyers and, if this continues, we risk having a nasty correction. But how nasty? Enough to put an end to the bull market? Not very likely! Look at how far away the trend line from March 2009 is! In order to challenge it, we would have to drop over 2000 points and break through two major trend lines plus the 200-DMA. It's not impossible but this would take some time and there would be plenty of warning!
Now, let's focus on the near-term. From the price action, we can see that we have broken a short-term (green) trend line and followed up with breaking below the (blue) 21-DMA and the former short-term low. These are already several good reasons why there might be an intermediate top in place. In addition, the indicators are all in downtrends with only the MACD remaining positive. The SRSI made a new low and went negative on Friday. But the worst, by far, is the A/D oscillator, at the bottom of the page. It went negative over two weeks ago, making lower and lower lows. When the DOW made its final high, it remained negative and barely moved up. On the other hand, it has reached a level from which rallies normally start!
In summary, everything on this chart points to steady technical deterioration. Until it improves, we should expect lower prices.
By contrast, the Hourly chart actually gives the bulls some hope that we are not yet ready to fall apart! Whether this is the case and, if it is, whether it means that we simply engage in additional distribution instead of extending the main uptrend, remains to be determined!
Friday's Dow action could be construed as potentially bullish. The index did trade below 15405 (the former low), but it recovered enough to close above that level, making this an unconfirmed break. Note also that 15405 is almost exactly the level of the 233-hrly MA which often acts as support. Finally, the indicators did not confirm the break either. In fact, both MACD and A/Ds showed relatively strong positive divergence on that low.
The near-term technical picture suggests that this could be a shake-out followed by another rebound before we have a confirmed break. It would explain the reason why none of the other indices were as weak as the DOW and held above their support levels. It would also explain why some leading indicators (such as XBD, VIX, XIV and others) do not seem ready to confirm a significant top.
The next few days will probably determine what to expect over the short-term. The best posture, right now, is to be completely neutral until more clarity emerges about the market's intention.
Cycles
In the last letter, I mentioned that the 33-wk cycle (the halfway point of the 66-wk cycle) is due a little past mid-august, ideally on the 18th.
There is no clear precedent to suggest that this cycle will be a high or a low, but it is capable of being either.
Breadth
The McClellan Oscillator and Summation Index appear below (courtesy of StockCharts.com).
As I mentioned in the Overview, it's hardly a bullish picture and it does point to a market which is topping. Don't forget that this pattern occurred as the market was making a new all-time high, thereby generating considerable negative divergence. That being said, as long as the top is not confirmed, it does not prevent one more rally from occurring.
Sentiment Indicators
In the SentimenTrader (courtesy of same), both indicators have reverted to neutral. By not going beyond 60 and pulling back, the long term indicator has left some doubt about whether or not we have made an intermediate top.
VIX
This is one of the indicators that has me keeping both feet in the neutral camp a little longer. Over the short-term, VIX is tracking SPX perfectly. It made a new low when SPX made a new high, and last week failed to break above its former high, just as SPX has failed to make a new short-term low. It is true that it has not gone below its March low, but I would prefer to see that divergence occurring over the short-term as wel,l before calling for a confirmed reversal.
XLF (Financial SPDR)
XLF is doing what we want it to do at a significant top. It is diverging negatively from SPX. In fact, like the DOW, it has broken below its former support level. So why am I not selling the house, yet?
First, the new low is not important enough to signal a reversal decisively. On three consecutive days it has held at the level of the former low. Next, the SRSI is oversold and could turn up on the smallest uptick. While XLF has taken the first step -- negative divergence to SPX -- it remains on the edge and has not yet taken the leap.
BONDS
The most bullish thing one can say about TLT is that, after initiating a long-term downtrend, it has begun to decelerate. The reason could be that there is a good Fibonacci projection to 104.50 which could point to a short-term low and result in a rally in a downtrend back up to about 114.
GLD (ETF for gold)
Gold rallied after the bottoming of its 25-wk cycle caused a mini selling climax, exhausting the downward pressure for the time being. The rally, whatever form it takes, is probably only a rally in a long-term downtrend and not the beginning of a major reversal. It has been stopped, perhaps only temporarily, by the top channel line, overhead resistance, and the 55-DMA.
Structure and the GLD indicators suggest that it may be about to extend its rally from 115, providing the market decides to make a new high before starting an intermediate correction. There is still an unfilled projection to 110 which should be met sooner or later.
UUP (dollar ETF)
UUP has returned to the bottom of its channel in conjunction with a rise in the euro. This is an area where it has found support previously. UUP is most likely in the process of forming a long-term base from which it will eventually break-out on the upside. The timing of that break-out could coincide with the Fed's modification of its monetary policy.
USO (United States Oil Fund)
USO started a short-term uptrend from 31 in mid-April and recently paused in conjunction with the market after a 7-point rally. The resumption of the uptrend depends on the market making one more short-term up-leg as well. USO has higher targets in mind but will delay reaching them if the market is starting an intermediate-term correction.
Summary
The market may be on the brink of starting a significant correction. The DOW Industrials came the closest to confirming this on Friday, but some follow-through is needed, especially from a number of leading indicators which, so far, have refused to roll over.
Clarification of the market's intention should come next week.
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