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 Fed policy of keeping interest rates low has severely curtailed the full downward pressure potential of the 40-yr and 120-yr cycles.
Intermediate trend - Probably tracing out an ending diagonal pattern.
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.
CRITICAL SUPPORT HOLDING
Market Overview
SPX sold off sharply for two days starting last Monday but found support on Thursday. This enabled it to rally on Friday -- with the help of options expiration - and reclaim about .382 of the decline. As we will see on the chart a little later, critical support held once again, but the two-day rally is lacking conviction and Monday should be a test of the SPX's resolve to remain in an uptrend.
The DJIA's action was similar to the SPX, but the support level is not as well defined as on the former. However, it is, so far, following the proposed script of an ending diagonal even including the small throw-over above the top line on Monday before starting its decline. On this index, it seems that the support is better defined by connecting the last three short-term lows which are in perfect alignment. This makes last week's low of 15,397 the critical level at which the DOW must hold.
IWM made a slightly new low on Thursday morning but bounced back immediately - as did the other indices. XLF broke an important support line, back-testing it by the close. QQQ held its support line.
It is clear that on Thursday, all indices tested and held critical support. If the rally that ensued turns out to be as puny as it currently looks, we may have another test early next week. If that test is successful, we could embark on a choppy uptrend that could turn out to be another test of the high.
But perhaps it won't be! The move which started at 1646 topped at 1850 for a gain of 204 points. The next phase started at 1738 and completed at 1897 for 159 points. The third (and probably last) phase started at 1854 and completed at 1902 for 48 points. If 1902 is confirmed as the high of the move from 1854, these phases -- which have become progressively smaller and smaller -- represent major price deceleration which should be followed by a significant correction.
Chart Analysis
I am going to show you the daily chart of the SPX constructed with the daily closes only, as I did last week. Note the short, heavy red line which is drawn across six short-term lows, starting on 2/16! Three touches of a trend line are normally required to make it valid. Double that amount is rarely seen and has to define this one as a very important support line. If it is broken, there is a very good chance that prices will extend their decline, perhaps significantly, especially if they get past the purple uptrend line.
I want to point out once again that drawing parallels to previous trend lines appears to have value for the analysis of the SPX. I believe that they determine price trends. Here, for instance, we have a red trend line drawn across the top (three points of contact), and a series of red parallel lines drawn from previous highs and lows. The dashed parallel line just below the top has acted as resistance on several occasions including being responsible for the formation of the last top. The next line has also provided occasional resistance, but the one below it is the one that I consider critical. I believe that the red trend lines determine the long-term trend of the market.
The next set of parallels is purple and these most likely determine the intermediate trend of the market. The one which is key is the one on the far left. Parallels to it drawn from previous closing prices appear to have value as support and resistance, as you can see on the chart. The parallel drawn from 1646 has been broken twice. The first time, prices managed to get back above but the second time they could not after three separate attempts, including the recent high.
The next purple trend line becomes critical support if the red parallel line from 2/16 is broken. If it is broken as well, that would be a strong indication that we have started an intermediate decline.
Next, we have the green set of parallels which, I believe, represent the short term trend. The key trend line is the one which connects with the 1883 top and forms the top channel line of the uptrend which started at 1738. The last green parallel on the right was decisively broken after SPX made its 1902 top, last week.
The decline from last Monday's high looks incomplete. If so, we could continue down to challenge the 1814 low. I believe that only when that low is decisively broken will we be able to say definitely that the market is in an intermediate or long-term downtrend.
A quick glance at the indicators also suggests that we are in an incomplete downtrend and that lower lows should be expected.
Now, for a detailed analysis of the hourly chart (also constructed as a line chart)! The trend lines will not compare exactly with those on the daily chart for obvious reasons, but the three sets of trends identified in the daily charts with red, purple and green parallels are also found in the hourly chart. Our focus should now be on the convergence of the three parallel at Friday's low. If that low is breached next week, we could be on our way to challenge the 1814 low, and if that low does not hold, it should confirm 1902 as an important top.
Both MACDs (price and A/D) have already established a lower low than the one of 5/07 while SPX held it. My intuition tells me that last week's decline will not stop there, but go lower; although the indicators do not appear to be quite ready to turn down and may require a little more topping action. The P&F base established at 1865 also carries the potential for taking the index a little higher.
Cycles
Looking at the pattern being made by the SPX over the past couple of months, it looks as if longer term cycles are topping and slowly gaining control. Let's allow for a little more time to clarify the picture.
Breadth
The McClellan Oscillator and the Summation Index appear below (courtesy of StockCharts.com).
The McClellan Oscillator has made a new low, but turned up with Friday's market action. Let's see what it does next week. It has room on the downside before becoming oversold.
If it remains negative, the Summation Index will continue to decline. Judging by the latter's RSI which is just below average, it too has some room before becoming oversold. Both indicators will continue heading in the same direction until the NYMO can return to the positive zone and pull up the NYSI before it makes a new low. Since it is already showing negative divergence with its last top, this would be the first lower low since last December and would confirm that a market correction has started.
Sentiment Indicators
The SentimenTrader (courtesy of same) shows no change in its long-term and short-term indicators from last Friday. It does not have real forecasting value until it reaches more extreme readings.
(unchanged!)
This item, however (also courtesy of Sentiment Trader), is interesting!
VIX (CBOE volatility Index)
VIX appears to be following the pattern made by the DJIA, but in reverse. A few weeks ago, I proposed that DJIA was making a terminal pattern in the form of a triangle. Nothing has happened so far to dissuade me of that possibility. Last week, the index seemed to have completed that pattern with a small thrust outside of the top line and an immediate reversal. Again, VIX did exactly the same pattern, but upside down! If DJIA continues to correct from here, it would cause the VIX to start an uptrend in earnest.
XLF (Financial ETF)
XLF continues to maintain relative weakness to the SPX. Last week, when the latter made a new high, XLF remained well below its 3/21 high, and during the decline that ensued, it found support at 21.56 -- a level that had been tested twice before. If the index closes below 21.28, we can say for certain that an important correction which started at 22.65 (3/21) is continuing after about a month of consolidation.
TLT (20+yr Treasury Bond Fund)
As I suspected, TLT was aiming for the major trend line which starts at its July 2012 top. A trend line of this magnitude should hold prices back for a little while, but they may also go through it first and then consolidate using the broken trend line for support.
If the trend line is broken, it represents a major hurdle which could tell us a great deal about the equities market condition.
TNX (10-yr treasury yield index)
This index, similarly to TLT, is also considered a powerful gauge of the diminishing demand for stocks. Although the charts are different, it is at the same critical point as TLT which is challenging a 2-yr downtrend line. TNX, on the other hand, is attempting to hold a support level of a year's duration. Breaking that level may require some preparation, but if it is broken right away, it will be a measure of the weakness developing in the equities market.
GLD (ETF for gold)
GLD continues to consolidate above the 144-MA. The longer the consolidation takes, the weaker the index will appear to be. The next 25-wk cycle is now only about 5 or 6 weeks away and it should soon enter its hard down phase. It may be that we will now have to wait until the next cycle low to evaluate the future of GLD, properly!
UUP (dollar ETF)
I have adjusted the trend lines on the UUP chart so that they better define the current trend of the index. As you can see, it is trading in a narrow channel contained within the large channel. If it continues the rally from its low, its next challenge will be the 144-MA which as provided resistance since last August and, if it can overcome it, it should next challenge the top of its intermediate corrective channel.
USO (US Oil Fund)
USO is ostensibly moving in an up-channel, but it has serious resistance ahead. The most imortant one is the red inner trend line which has had an effect on its trend since August of last year. These points are marked by the green and red arrows. Its next challenge is only 75 cents away, at about 38. If it can move above it decisively, it could be on its way to the top of the green channel.
Summary
The SPX -- and the market in general - is teaching us patience! It is too late to be bullish and too early to be bearish. In spite of the fact that the index made a new all-time high last Monday, the odds appear to have shifted to a more negative trend. The sharp rebuff of the bulls at the 1902 level came just short of producing a confirmed short-term top and we were left at another critical decision point.
If the SPX can extend its decline and break below the important red support line that shows on the daily chart (above), it will have come one step closer to confirming the beginning of an important correction. The next and final step should come if it breaks the trend line which connects the 1738 and 1854 lows.
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