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analysis: Cycles - Breadth - P&F and Fibonacci price projections
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"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 made a new high after ending its correction at 1627. It is already pulling back, and the decline does not look over.
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.
The correction which has been underway since the 1730 top is already almost two week old. After the initial fast drop of about 30 points, it has continued in a gradual, but relentless manner. By Friday's close, it had added another 15 points to the decline and may now be ready for a bounce in conjunction with a short-term cycle due next week, but this is not expected to be the end of it. I mentioned in a previous letter that there was an 18-week cycle bottoming after the middle of October, and it is likely that downward pressure will continue into that time frame.
There is a dichotomy between hourly and daily oscillators with the former ready to provide temporary relief for the bulls, but the latter are just now starting to go negative and are expected to dominate the trend for a while longer.
The dichotomy is also obvious in the various indices. The DOW Industrials are by far the weakest, while NDX and Russell 2000 are hovering near their bull market high; This condition alone should tell us that we are only in a temporary decline and not yet at the top of the bull market. But that top is no longer in the distant future. After this correction, one more high could bring about a major turn. Of course, this will require confirmation, but be prepared just in case this possibility becomes reality. The basis for this warning is discussed in the next segment.
We'll first analyze the daily SPX chart, and then the hourly chart (courtesy of QChart). This will give us a good perspective of the current market condition.
At first look, the daily chart shows that the price action of the past 4 months is describing a wedge pattern, a formation which occurs at the end of bull markets. It is known as a running triangle or an ending triangle. Glenn Neely calls it a "terminal impulse". Whatever name you choose, it spells: "end of the bull market". If the formation continues to evolve as described on the chart below, it will greatly increase the odds that SPX is coming to the end of the road and is about to turn around.
We are currently in wave 4 and will probably experience a small bounce before completing it. The trend line from 1343 (or slightly below) would be a good place to end it before starting wave 5. There are already a couple of potential targets in place for the end of 5, but we'll let 4 complete so that we are able to decide on the best count.
The lines simulating future market action are not meant to reflect accurately the timing of the moves.
Previously, I also pointed out the pattern which was being made by the H&S neckline and its parallels. The top (red) one has become the top of the wedge pattern with the last rally stopping on it exactly. The lower (green) parallel may stop the decline temporarily after we complete the bull market. By the time the price gets down to that level, it will probably coincide with the 233-DMA and this will offer additional support.
Now, let's go to the oscillators. Last week, the two lower ones - which are the most sensitive - went negative, but not by much. They may turn up briefly with the bottoming of the 4-wk cycle, and then resume their decline until the downside target is met when the longer cycle makes its low.
The MACD lines are on the verge of making a bearish cross. They may do so, then flatten out as the price bounce takes place, and eventually go negative. We should still be at least two+ weeks away from the larger cycle low.
If we now turn to the hourly chart, we can plainly see the climactic thrust that was provided by the Fed's decision not to taper. It went to the top of the green channel (dashed lines) and reversed almost immediately. After breaking the green trend line, it quickly descended to the bottom of the purple channel where it found temporary support, bounced for a few hours, and then started a gradual decline, forming a slanting correction that normally resolves itself bullishly. In this case, we might expect a rally out of the channel to about 1708 before prices run out of steam and start down again.
The oscillators are all showing some positive divergence, indicating that we are near a turn. The index found some support at a prior consolidation in the uptrend, while closing a gap caused by Larry Summers' withdrawal from consideration as the next Fed Chairman. Whether or not there is another small dip into the short-term cycle low, we appear ready to bounce next week -- perhaps from the (red) 233-hr MA.
The middle oscillator (SRSI) usually needs to become oversold before the market is ready to turn, and the lack of an agreement between the two political parties over the weekend, could provide that opportunity. Based on other indicators, the short-term trend has been down since we broke out of the purple channel. It could turn up briefly before we complete wave 4.
The same, but daily, indicators tell us that the daily trend is still up and should remain up until finally breaking the trend line from 1343.
"An 18-wk cycle bottoming in the second half of October could affect prices adversely after wave 5 has topped."
The top came at 1730 and the current decline is the result of that cycle, assisted by the 4-wk cycle which peaked about 2 weeks ago.
The McClellan Oscillator and Summation Index appear below (courtesy of StockCharts.com).
After reaching an overbought condition, the McClellan oscillator has returned to the zero line where it could hold for a few days before going negative.
The summation index is beginning to roll over again, making a lower high than the former one. The trend has been down since June, when it peaked, and it continues down.
The SentimenTrader (courtesy of same) indicator scores have ticked back down to neutral as the correction has progressed. They should eventually rise to a bull market top reading as we reach the final price level. That's most likely still a few weeks away.
VIX has begun to make a long-term pattern similar to that of SPX with descending highs and rising lows forming a wedge. The difference is that it is making higher lows as the SPX is making higher highs, thereby creating a pattern of positive divergence which should indicate that a top is forming. Since it is a weekly chart, this should be an important top. When VIX starts making new highs, SPX will probably have started a major decline.
XLF (Financial Index)
XLF failed to make a new high when SPX did -- which was a sign of relative weakness indicating that a market top was in the making. Now, on this 2-hr chart, XLF is refusing to make a new low along with the SPX corrective pattern. This could be telling us that a short-term market bottom is in the making.
TLT appears to have found support at the bottom of its secondary channel line, created a double bottom, and started a rally. It should find resistance at the broken support line. If it manages to break through, it could try for the top of the channel. However, that should be later and only if it forms a larger base pattern. Currently, there is only enough of one to get it up to the resistance line.
GLD (ETF for gold)
GLD rallied in conjunction with its 25-wk low, found resistance where it should have, and started back down again. There is an unfilled P&F target at 110 which could be its next objective. It may also simply be testing its former low while creating a large base which would allow it to start a bigger rally. More time is required to sort out its intentions.
UUP (dollar ETF)
UUP has not gone anywhere important for a long time. It is patiently waiting for the end of the Fed's easy money policy. In the meantime it is creating a large base which could eventually support a strong uptrend.
USO (United States Oil Fund)
USO has a revealing long-term chart. Since its collapse from inflated prices it has been trading in a comparatively shallow channel. After crawling along its lower trend line for almost a year, it started to move up, but found resistance at the mid-channel line which corresponds to the top of another descending (red) channel.
It is possible that, with time, USO will be able to move out of the red channel and make it to the top of the green one. It has established a base which is capable of supporting such a move.
The market is in a corrective pattern which could continue until the second half of October, but may be ready for a bounce out of its slanting channel by mid-week before moving lower.
We are getting close to the top of the bull market, and it should not be too long before the very long term cycles mentioned above under "Current Market Position" begin to turn the long-term trend down. They are already causing long-term deceleration which appears to be forming a terminal impulse pattern.
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