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: Long-term trend - In 1932 and 1974, the 40-yr cycle was responsible for protracted market weakness. The current phase is due this year but where is the weakness? Has man (Federal Reserve) finally achieved dominance over universal rhythms or has it simply delayed the inevitable?
Intermediate trend - Intermediate correction (primary wave IV) underway.
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.
INTERMEDIATE WAVE B HAS STARTED
Market Overview
After a 200-point decline, wave A of primary IV is complete and wave B has started. Already an 80-point rally has taken place since Wednesday's low of 1821. After a very long (boring for traders) stretch of low volatility, daily moves of 100-points or more in the DJIA (sometimes much more) have become the norm - on Wednesday SPX had a range of 53 points! This is not a market for the faint-hearted amateur, but it brings a smile to the trader's lips (providing he knows what he is doing!). And is this going to continue at this pace? Probably, as long as we are in a corrective mode -- which could be until early next year! If, in fact, this decline consisted of only wave A, you should prepare yourself for much lower prices before it is over. Let's get a feeling for where we are!
Momentum: Warning that this correction was coming was apparent in the momentum indicators. I have pointed out on a weekly basis the increasing weakness taking place in the MACD of all time frames. The weekly and daily are still declining with the weekly hitting its lowest mark since December 2013, and the daily its lowest reading since August of 2011 (which is not surprising since that was the low of Primary wave II). As for the hourly, it is the only indicator which has turned up with its fast MA having reached neutral on Friday.
Breadth: After an 80-point rally, the McClellan Oscillator has turned positive once again with a reading of +10, enough to stop the precipitous decline of the Summation Index which finally bottomed at -625. This approximates the August 2011 low of wave II. We will have to see some positive divergence developing in that indicator before we can talk about a low in wave C.
VIX: If this was going to be a legit intermediate decline, VIX should have soared to a new recent high. Sure enough, it topped at 31 on Wednesday and has since pulled back. This was considerably less than Primary wave II's high of 48. Does that mean that the total correction will be less than Wave II's 250 SPX points? I would not bet on it! Even the lesser projection (at this time) exceeds 300 points.
Structure: Best estimate is that we have completed wave A of primary wave IV at 1821 and that we are currently in wave B.
Accumulation/distribution: The distribution pattern called for a minimum P&F projection to 1820 for wave A, and something more likely in the 1790/1800 range. SPX chose the higher target and made its low at 1820.66
Cycles: Whether or not this decline is the result of the long-term Kress cycles is inconclusive. Since this is not likely to be the top of the bull market, but only the last significant correction before a top, can the 120-year Kress cycle still be the cause of the next bear market bottom a few years from now?
Chart Analysis
I want to first show the weekly SPX (chart courtesy of QCharts) with the McClellan Summation Index posted under it; this is the best way to depict the weekly breadth as an oscillator.
The time span is from the bottom of primary wave II to the top of primary wave III, plus the four following weeks which encompass the start of wave primary wave IV. It did not take an astute observer to notice that all the indicators had peaked on the previous high. The negative divergence displayed significant deceleration in the price movement -- the almost certain likelihood that primary wave III was coming to an end. The intervention by the Federal Reserve which promoted easy credit undoubtedly prolonged its duration by several months. Now, finally, we have arrived at the last intermediate correction before the top of the bull market. We'll discuss time and price projections when we get to the end of wave IV which should still be several more weeks ahead.
On the weekly chart, the entire wave III fits very well within a channel starting from the October 2011 low of wave II. The trend was so strong that the last short-term phase almost made it to the very top of the channel, and if it had not been for the extreme divergence that showed in the oscillators, one might not have suspected that it was coming to an end. Note that wave A of IV found support almost exactly on the bottom of the channel. I would expect it to be penetrated to the downside by wave C.
The signs that the correction had started came when the red, deceleration channel bottom line and the trend line from 1343 were broken in quick succession. Before this, the selling was contained, but when it became obvious that something more than a short-term decline had started, sellers came out of the woodwork! The downtrend found support at a predictable level: the combined intermediate channel low and the green parallel to the deceleration channel lines.
Let's now turn to the daily chart (also courtesy of QCharts) to take a closer look.
On this chart, the same trend and channel lines have been drawn so that you can compare them with the weekly chart. The daily chart shows that the low point of the SPX decline did not exactly hit the lower support lines; with the rebound in prices coming a few points higher. There is an added support line drawn from the 1814 low which is not shown on the weekly chart, as well as several short-term trend lines which were broken in succession before the one from 1343 gave way.
On this chart, we can see better how little deceleration there was at the top of the primary wave III channel before prices rolled over. This also shows the importance of oscillators that show the loss of momentum -- which is not immediately perceptible on the price chart. In this case, the MACD had been making a series of lower lows since its peak in June, with the most compelling one occurring at the very top of the uptrend. The advance/decline differential oscillator (bottom) had a final surge in August, but it was downhill after that, especially when the last bump up which matched the top of the market was not even able to make it above the zero line.
(Incidentally, I have eliminated the "BREADTH" section in this weekly letter. I show the McClellan Summation Index under the weekly chart, and my own version of the McClellan Oscillator using the MACD of daily advances minus declines, almost duplicates it. Posting both again as a separate section would be redundant.)
Note that I have also drawn a steep (dark blue) down-channel to represent wave A of the correction. The first rally stopped at a junction of several resistance levels: the top line of the downtrend channel, the 5-DMA, the previous top of 1998.71 and, most important of all, the (red) 200-DMA which had been broken during the decline. In addition there was an interim P&F projection to 1998. It was entirely appropriate for the initial 80-point rally to come to an end at this level. That, however, is not expected to be the end of wave B. It should trade outside of the channel and to higher projection targets.
Now for a quick look at the hourly chart to get an idea of where we are in wave B.
If wave B is composed of only three phases, there is a good chance that the initial 80-point rally will make up the first. In that case, this would be a small "a" with a small "b" to follow at the beginning of the week, and then a small "c" later in the week. This is only an assumption which may not be correct because it would not consume enough time if the correction is expected to continue into the beginning of next year, so we could get a more complex pattern. The oscillators which have begun to roll over suggest that a minor correction has already started.
Another less likely possibility is that wave A will require a deeper correction than it has already achieved. Perhaps it could still reach 1790 before being complete. That would use up more time but be totally unexpected, and I don't give it much credibility. We'll just have to wait and see what the market has in store for us.
Sentiment Indicators
The SentimenTrader (courtesy of same) long term indicator has dropped to 40. Since we don't seem to have arrived at the end of the correction yet, I suspect it might even go lower by then.
VIX (NYSE Volatility Index) - Leads and confirms market reversals.
A mild warning by VIX in late August became more and more forceful as we moved forward. Soon afterwards, it began an uptrend and had a small pull-back in late September at the height of the price trend. This markedly increased its warning that SPX had reached its peak. VIX's rise to 31 is the highest point reached since mid-2011 and the decline of primary wave II. It should confirm that primary wave IV is underway.
IWM (iShares Russell 2000) - - Historically a market leader.
Once again, IWM fulfilled its role of leader, becoming part of an early warning system which prognosticated the advent of a market correction; except that it waved a yellow flag in June -- well before the market top -- and a more urgent red one in September. On Wednesday, it only showed some moderate weakness, refusing to join the avalanche of stocks which were being sold with abandon. Once again it was ahead of other indices by suggesting that the worst of the decline was coming to an end and that a rally was imminent.
TLT (20+yr Treasury Bond Fund) - Normally runs contrary to the equities market.
The climactic end to the decline on Wednesday was full matched by TLT which surged past its top channel line to form a broader channel. When the market rallied, it retraced sharply and should now consolidate in preparation for phase two of the correction.
GLD (ETF for gold) - runs contrary to the dollar index.
It is true that GLD did not decline proportionately to the dollar's advance, and that it did hold support where it should have but, so far, this looks only like a rally in a downtrend. And with the 25-wk cycle low looming ahead, the gold bulls are still not out of the woods.
UUP (dollar ETF)
Lending support to my analysis of GLD, it looks like UUP is now in a wave 4 correction of the uptrend which started when it broke out of its base. Wave 5 should carry it even higher, at which time GLD will be at risk of making a new low.
USO (US Oil Fund) - following chart courtesy of QCharts.com.
USO is caught in a serious downdraft which is threatening to send it below its June 2012 low. If that support fails, next is the 2009 low, but it is likely to find some temporary support at or above 29.
Summary
The market action of the past two weeks has confirmed that SPX is currently in primary wave IV of the bull market.
It is also likely that wave IV is evolving into an A-B-C corrective pattern, and that wave A has probably been completed at 1821. Wave B has already caused a rally of about 80 points in the index and is entitled to a minor correction. But everything suggests that it has farther to go in both time and price. When it is complete, we should reasonably expect that the decline will continue in the form of wave C.
If this analysis is correct, it means that we are only in an intermediate correction and that the top of the bull market is still ahead of us.
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