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using technical 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 Long-term trend: The long-term trend is up but weakening. Potential final phase of bull market.
SPX Intermediate trend: The uptrend from 1810 continues, but it has entered a corrective phase which could extend into November.
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 discuss longer market trends.
My analysis of the SPX foresaw a rounding top correction which would accelerate downward as we came closer and closer to the cycle(s) low point(s). I believe that the price action of the index in the past two weeks has borne this out. After trading in a 60-point range for about two months, the trend accelerated downward with SPX closing lower for the past nine trading days. Still, the selling is not aggressive and the index only lost 70 points during that period. Quite a contrast with last August when it lost 236 points in only four days!
We should be nearing the low of the move (as estimated by the minimum price projection), with the completion date now appearing to be arriving ahead of schedule. Originally, the 20-wk cycle was deemed to be due on about 11/23. For that date to be still valid, we would have to extend the move to the next lower price projection.
The lack of aggressive selling is also apparent in many of the leading indexes we follow. TRAN, which led the market lower into its January low, has completely ignored the current sell-off, and stands near its recovery high. When the correction ends in the next week or so, we should get a rally whose nature we should study carefully to determine if we are on the way to the 2240 projection (as indicated by the base formed at the 1810 level) or if we are simply creating additional distribution for a more important decline after the Christmas rally.
It took a long time for the SPX to react to the breaking of its trend line from 1810. Several back-tests of the line took place before a downtrend finally got underway, but when it did, it kept going – nine consecutive down days which (only) produced a 70- point decline. On the chart, the steepness of the trend makes it look far worse than it is. From a technical standpoint, despite breaking the intermediate trend line, the longer trend remains up providing we do not trade below the Brexit low of 1992. The decline has already retraced a little more than 50% of the uptrend from that low and, since it roughly corresponds to the minimum projection determined by the top distribution phase, we should be on the alert for a potential end to the correction. Continuing the decline beyond 2070 -- which is a projection point, a pivot point, and a .618 retracement from 1992 -- would be a warning that, even if the correction is over, our chances of making a new high afterwards have been reduced. This is where the action of our group of leading indexes will become valuable. But that is not in the immediate future and not our primary focus point.
Let's look at the oscillators! The most interesting one is the A/D oscillator, at the very bottom. It turned up in the middle of the week, even though the index was still dropping. This is normally a very reliable sign that we are approaching the low of the move because it is the early bird the great majority of the time. The next one which usually gives us warning is the SRSI, currently oversold but that has not yet turned up. The MACD, the laggard, is still declining with the barest appearance of deceleration in its red MA. Incidentally, this indicator is not making a pattern of positive divergence, and this could mean that any rally we get over the next few days may not be the one which will reverse the trend conclusively.
This chart and others below, are courtesy of QCharts.com.
In a rounding top pattern, it is very difficult to find the trend line which corresponds to the declining prices. Only when prices have stopped curving down and started to decline in a nearly straight pattern, can we draw a valid trend line. So far, the only one which connects three tops is the purple one, but if I draw a parallel to it from the 2120 low, that “channel” line shows that it has already been penetrated. It is also not likely that the line drawn across the bottoms will stop the decline. Therefore, we must wait until we have a potential low in place to see if we can find a channel which defines the trend. The straightest downtrend is the one which started 9 days ago but it can only produce a minor trend line, at best. We'll have to wait for the pattern to be more complete before we can confirm a reversal when a trend line is broken.
Some minor positive divergence formed in the oscillators just before the last low, warning us of a bounce. Since then, the low has been re-tested, but all the oscillators have started new declines which do not look complete. This suggests that there will be lower prices ahead.
A minor cycle is due on Tuesday. That could bring at least a temporary low.
Some leading & confirming indexes (Weekly charts)
A quick glance at the various indexes below reveals that we are not in a major downtrend, but in a moderate correction, especially since the timing of the low is expected to be over the next one to three weeks. Of course, a sharp spike lower cannot be discounted before the bottom is reached, but even the most likely downside projection for this move does not spell a certain end to the bull market; that remains for the next rally after this correction is over to determine.
UUP (dollar ETF)
UUP reached the top of its long corrective channel and pulled back. The nature of the pull-back suggests that some consolidation will be needed before there is another attempt at moving out of the channel. Much more of a decline would not be a positive sign for the intermediate, and even the long-term trend.
GDX (Gold Miners ETF)
The recent rally in GDX has more the appearance of a consolidation in a downtrend than the start of a new uptrend, unless it is immediately followed by upward acceleration. This is not expected, although a retest of the recent high or a slightly new high is possible. This should be followed by a slightly new low to end the correction.
Note: GDX is now updated for subscribers several times throughout the day (along with SPX) on Marketurningpoints.com.
USO (U.S. Oil Fund)
USO is demonstrating its inherent inability to start a new uptrend right away. The initial rally was a knee-jerk reaction to an oversold condition, and the index is now settling down to form a base which will eventually lead to a more serious advance.
The SPX is approaching a minimum projection point for the correction, in both price and time, which could come as early as next Tuesday in conjunction with the bottoming of a minor cycle. If this proves to be only an initial low, a deeper retracement should take place into the week of the 21st, which is when the 20-wk cycle should ideally make its low.
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The above comments and those made in the daily updates and the Market Summary about the financial markets are based purely on what I consider to be sound technical analysis principles. They represent my own opinion and are not meant to be construed as trading or investment advice, but are offered as an analytical point f view which might be of interest to those who follow stock market cycles and technical analysis.