Striving for Technical Excellence
A 3-dimensional approach to technical analysis
Cycles - Structure - Price projections
"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
The long-term trend is up
The intermediate trend is topping
The short-term trend is in the process of completing a wave count and distribution phase
Projections: Over 2 weeks ago, I gave a projection for the SPX of 1400-1405 as the potential target for the end of the move which started from 1225. It was based on several Fibonacci ratios measured from various levels along the longterm advance. A shorter-term Point & Figure target gave us a1409 objective. As I mentioned earlier, this area has a cluster of Fibonacci projections which make it an ideal level for an intermediate top to form. I will show you some of the most pertinent ones on a chart later on.
The action of the SPX over the past two weeks is beginning to validate these projections. Little upward progress has been made, resulting in the beginning of a deceleration/distribution pattern.
Structure: Although the past two week's action appears to be pretty much random and trend-less, there is a process of Elliott Wave completion which is taking -- and must take -- place before the intermediate top is complete. Because of the shortness of the waves involved in this process, and the fact that they can sometimes be completed intra-day, it makes the analysis complicated and often subject to revision until a pattern is complete and clear --in retrospect. But this is difficult only because of the compaction of price movement in this time period. When we get past it and the waves begin to stretch out in time and price, the analysis will become easier.
Cycles: The past 6 months have been a difficult time for cycle analysis. First, the 4-year cycle did something unpredictable, deviating substantially from its historical pattern. Next, the shorter-term cycles were pretty much leveled by the strength of the advance, making them unrecognizable and irrelevant. The 6-week may be in the process of reasserting itself and should, once again, become an important factor in our analysis. Unfortunately, once a cycle has skipped a beat and done something unusual, it usually takes another phase to confirm that it is back on track. This should be easy enough with the 6-week, but the 4-year will keep us guessing for quite a while before we can be certain that our theory of a June low can be validated.
Breadth: There is no question that the A/D is losing upside momentum, but still "hanging in there". This is more visible on the hourly chart which records the intra-day pattern. From the last important low of 1361 on the SPX, it is obvious that the thrusts into positive territory of the NYSE A/D are getting shorter and shorter, while those of the NQ are much worse. With the exception of one hour into positive territory, the NQ A/D has spent the last 6 trading days in negative territory. This is giant red flag, consistent with the pattern of deceleration/distribution currently taking place!
Trend: In my last post, I defined the trend with the help of trend lines and channels. These are well-marked on one of the following charts and it shows that, in spite of the current creeping weakness, we are not yet in a position to challenge them. This is also consistent with the structural analysis mentioned above, and it tells us that more time -- and probably slightly higher prices (meeting slightly higher projections) will be required before the SPX can reverse its upward trend.
Divergence: As mentioned repeatedly, the relative performance of the NDX to the SPX is an important gauge of the beginning and end of an intermediate trend. The July low was a rare exception to this pattern and added to the confusion of that time period. However, the NDX was in a different structural configuration than the SPX and needed completion before a reversal could take place. And besides, our tendency to lose sight of the long-term perspective in preference of day-to-to day action may forbid us to recognize that a long-term divergent pattern may be taking place. If the NDX diverges on top after diverging at the bottom, it may be telling us something which is very significant about the long-term trend.
Now, let's put some of the above observations in graphic form. First a chart of the SPX which shows a partial cluster of Fibonacci projections, and the best guess of the EW count to date. Note how Wednesday's advance was halted at the conjunction of two close Fib. counts, further supported by a P/F count slightly above at 1409.
The next graph compares the performance of the two indices (SPX, NDX) to their respective A/D on an hourly basis. You can see how the strength of the A/D is slowly ebbing with each attempt at moving higher -- especially in the NDX. The green channel lines represent the uptrend from the July low on both indices.
One more chart should suffice to cover the rest of the points made above. This SPX hourly chart shows the more narrow and wider channels shaping its present uptrend. These are expected to be broken in confirmation of the coming intermediate term reversal.
The chart also shows the assumed 6-week cycle lows since June. The difficulty came with the low of the next to the last one because it was not obvious, and therefore makes the 11/3 low remain unconfirmed until the next low is in place, about the 2nd week of December.
The momentum indicator at the bottom of the chart (best observed in the first chart) is representative of the move from 11/16. It has kept moving lower as the index was trending higher. The next short-term uptrend will not take place until the indicator is able to start moving up. This could take a couple of days.
The Elliott wave analysis, if correct, suggests that we are nearing the top of the intermediate move from the June/July lows, but we are not quite there yet. This is pretty much confirmed by the trend line/channel analysis which places the current price too far away to be threatened immediately.
The weakening A/D figures are indicative of the formation of a short-term top, and the probable completion of the Elliott wave which started at 1376. But they are also indicative of a larger deceleration/distribution process taking place. In other words, less and less buying and more and more selling as the market advances.
The total technical picture best projects an intermediate top occurring not immediately but more likely in a few weeks, perhaps at the end of the Xmas rally, after the EW structure has had time to complete two more waves of larger degrees than the present one. This would allow for the current 6-week low to take place at its conjectured time and provide the lift for the final rally to one of the higher Fibonacci targets.