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 - Important top formation is in the making.
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.
ARE WE THERE YET?
Market Overview
We have arrived at the time frame when, according to cycle analysts, multiple cycles are topping. The ideal stated time window for this to take place was between the middle of last week and the beginning of next week. Since we are dealing with multiple cycles, it would make sense that this would be a time of volatility when distribution is characterized by wide swings in animal spirits. SPX has been trading in a tight range for the past two weeks, and the last two days of trading were particularly volatile.
Considering the technical characteristics of Friday's action which exhibited very poor breadth for a 23-point move in the SPX, this could be wave 2 after the declining 5-wave pattern completed on Thursday which followed a leading diagonal top. As we will see when we analyze the charts, both daily and hourly oscillators are already in very precarious positions and do not contradict a wave 2 interpretation. But if SPX makes a new high on Monday with strongly improving internals, that interpretation will have to change and the anticipated reversal could be delayed.
Many factors support a potential top, although we can also point to a couple of dissenters which are saying that more time may be needed. But if the cycle analysts are correct, the cycles are saying now, not later. Even if Friday was the beginning of a 5th and final wave which will carry the SPX a little higher, that move should be of short duration. As usual, we'll let the market itself decide on the exact time it wants to reverse.
Chart Analysis
Last week, I showed side by side charts of the SPX and IWM. I mentioned that we could be seeing the start of some meaningful relative weakness on the part of IWM, but that it would take another week to confirm if this was just a blip, or something more lasting. Last week, IWM significantly increased its negative divergence to SPX, especially in Friday's rally which saw SPX nearly reach its former high, while IWM only retraced about 50% of its decline.
I had also mentioned that QQQ was spiking in climactic fashion, far outpacing the other indices, especially the DOW. That process was halted last week and, for the week, QQQ showed some relative weakness to SPX. That is important because not only should QQQ behave as if it has ended its climactic spike but, like IWM, it also normally leads SPX in a trend change. These occurrences, by themselves, do not confirm that a top is in place, but they add to other bearish signs.
Today, we'll analyze the daily SPX itself. There is plenty there to make my point. If this chart showed the entire move which started in October 2011, you would see that, for many months, the trends were narrow and well-defined. However, since May of this year, there is evidence of some significant selling taking place. The action has become choppy, even though it has progressed higher and higher. This is represented by the red channel that I have drawn between peaks and lows, and one could interpret this pattern as deceleration in the major trend.
We also observe that the trend lines drawn across the lows starting from 1343 are fanning out. They keep on being broken; but each time the index has recovered and risen above the broken line to make a new high. I suspect that when the new (purple) trend line is broken, SPX will keep declining all the way to its 200-DMA or even the pale blue trend line -- at a minimum -- before it recovers. Will that recovery take us to a new high? Tony Caldaro seems to believe that we are only ready to start primary IV, which would be followed by primary V and the end of the bull market. That could be, but, ignoring his count (at our own risk), the downward pressure derived from major cycles could take us all the way to October 2014 before it concludes. October 2014 is the low of the next 40-yr cycle. The last one made its low in 1974, 21 months after its high. It would therefore not be unusual for a decline which starts now to last for a full year. I am open to both possibilities. If the market only wants to make a strong intermediate top right now and have one more rally to a new high in early 2014, before falling out of bed, so be it!
Getting back to the chart and turning to the oscillators, they are all already in a declining mode. It is true that the MACD did make a new high at the last SPX top (and the amount of negative divergence in this oscillator is very limited) but its MAs have already started a bearish cross. As for the other two, especially the A/D oscillator which is the equivalent of the McClellan oscillator (both of which always lead MACD), they are already in serious declines.
Now, let's peek at the hourly chart to see if it tells a different story. Not really! SPX was too oversold to challenge the important 1740 support level after its Thursday decline. The ES futures, on the other hand, did make a preliminary break below it before rallying. After deciding if it should react negatively or positively to the jobs report, SPX decided on the latter and started a bizarre rally during good part of which the A/D remained negative and only closed at a paltry positive 455 for a 23-point move in price. If that's a preview of what will take place next week, I would not get over-bullish. But then, the market may wake up with a totally different frame of mind on Monday morning, so let's wait and see what happens.
Neither the price MACD nor the A/D oscillator are looking particularly bullish either, and the SRSI is already overbought; but we have to wait for them to roll over for a sell signal to occur.
Cycles (repeat)
A cluster of topping cycles is being predicted for the second week in November (next week), perhaps extending early into the third. It does not give much time for another uptrend to start and complete.
A market top in this time frame would probably mean that the long-term cycles (30-yr, 40-year, 120-yr) due to make their lows a year from now are finally taking over.
Breadth
The McClellan Oscillator and Summation Index appear below (courtesy of StockCharts.com).
The McClellan Oscillator looks like my daily A/D oscillator. It has dropped into negative territory and barely rose on Friday's 23-point rally in the SPX. In and of itself, this may not be significant and what follows will tell the real story but, at the very least, it does not convert one into an instant enthusiastic bull over the short term! Nor does the Summation Index which has now turned down, although it remains positive. Note that it stopped rising at the 200-DMA. If you look back at the entire chart period, that MA has provided support and resistance consistently when reached. On this occasion, it seems to be offering some resistance to a further up-move, which could be another warning since the RSI (which is still overbought) as well the MACD have already turned down.
Sentiment Indicators
The SentimenTrader (courtesy of same) long term indicator closed the week at 70 for the first time in months, although it has hit that number several times over the past two weeks. That was the minimum level at which I expected it to rise to warn of a top.
Here is also an interesting headline from SentimentTrader. (Nov. 6): "The spread between smart money and dumb money has reached a troubling extreme. The last time we saw such a divergence, stocks peaked quickly."
VIX
One of the ways that I evaluate the readiness of the market to correct is by seeing how much of a base VIX has created. I keep a Point & Figure chart on this index and wait until it has had enough reversals to create a decent base. A week ago, the base was still too small to alert me, but by Friday, it had created a base large enough to get it up to the level of its secondary peak (18.50). A challenge of that level would only be the first wave up. After some consolidation, it would be expected to move even higher, perhaps decisively past its red downtrend line.
XLF (Financial Index)
One of the things that makes me think twice about the market's readiness to sell off is XLF's Friday performance. Helped by strength in the banking index, it had a very sharp rally -- in complete contrast with its previous relative weakness to the SPX. If, however, this was mostly caused by short covering, it will show up in future trading by its inability to hold on to its Friday gains.
BONDS
As anticipated, TLT did not go past its mid-channel trend line and started to pull-back toward the lows, and there is a real possibility that it could make a new low; we need to observe the action of the next week or two. I should clarify the short-term trend.
GLD(ETF for gold)
It is looking more and more likely that the bottoming 25-week cycle has turned the short-term trend around and is pulling at GLD. If so, the downtrend should continue -- and probably increase -- over the next 4 to 6 weeks with a likely target around 107/110.
UUP(dollar ETF)
Last week, I mentioned that there was a fair chance that UUP had come to the end of its decline. It proved that with its follow-through behavior. UUP is loosely subject to the same 25-wk cycle which is so regular in gold, but in reverse. It would make sense that pressure downward on GLD which is the result of the bottoming 25-wk cycle would be upward pressure for UUP, which would mean that the latter's uptrend is probably good for another 4 to 6 weeks.
USO (United States Oil Fund)
USO's attempt at rallying is beginning to look like nothing more than a corrective move in its long-term downtrend. The move failed at the top of the green channel and it is now heading for the lower trend line of that channel. Will it hold? That's what will be decided when it gets there.
Summary
On Thursday, the bears were rejoicing that the trend was finally shifting in their favor, but Friday's rally was a signal that they might have to exhibit a little more patience. If anything, the warning signs that the market is hammering out a major top have increased, but a couple of leading indicators are saying "not so fast -- I'm not ready!" leaving the issue in doubt.
Whether the bull has one last charge left in it or not could be decided as early as Monday, but topping cycles are shouting that time is of the essence. As usual, we'll let the market tell us when it's ready to step out of the bullish mode.
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