Technical Analysis Of The Markets

SPX: Long-term trend - Bull Market

Intermediate trend – SPX may have started an intermediate correction

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.

STOCK BULLS BEWARE!

Market Overview

After a two-week rise of 89 points from the bottom of the trading range which was created over the past 5 months, SPX gave up two-thirds of its gain in four days and looks as if it intends to go lower!   On its last correction, the index stopped just shy of the important 2040 support level which is the bottom of that trading range.   The odds have now increased that on the next challenge, it will fail.    

While the Greek situation has essentially been resolved -- causing a sizeable relief rally -- that problem has been substituted by a potentially much more severe one:  the slowing down of the Chinese economy!  Chinese economic data released on Friday was the specific catalyst behind the 23-point decline but, if you remember, in my last letter I mentioned that there were technical areas of weakness in the rally which needed to be addressed quickly if we were to fulfill the promise of the P&F base which called for higher projections.  These included the new highs/new lows relationship as well as market breadth.  Not only have these conditions not improved, but they have deteriorated further, and this does not bode well for future market action.

I mention Greece and China only as examples of the catalysts which mysteriously appear when large cycles turn down to give investors a “rational” reason to sell.  Besides the 7-year cycle which I have discussed repeatedly, according to Eric Hadik (INSIDE Track) larger cycles are also pressuring the market (including the 17-year cycle), and this could result in a substantial decline between now and October.  We’ll see!  Whatever the cause, it is evident that technical weakness appears to be on the rise.

Indicators Survey

The weekly momentum indicators are continuing their downtrend and have reached their lowest level since October.  Two of the three that I follow have already exceeded their October lows.

The daily momentum indicators are weak as well, but they are outdone by the breadth indicator which is so weak that it is already approaching oversold. 

The summation index (courtesy of MarketCharts.com) has turned down again but that’s not the whole story!  On the last rally, SPX came within two points of its all-time high.  Look at where the NYSI made its comparable high!  That’s what you would call “super” negative divergence.  This is an example of what I mean by increasing technical deterioration.

The 1X P&F filled a phase projection to 2078 on Friday, but the top distribution pattern has potential lower counts.

“The 3X made a base formation which could eventually take this move near 2200”.  Needless to say, this possibility was voided by last week’s decline.

Chart Analysis

The Daily SPX chart (courtesy of QCharts.com, as well as others below) shows how the index accelerated downward after breaking out of the small blue channel.  It will probably find some temporary support on the green parallel just below.  These lines have worked very well as support and resistance since the October low, and even before.  What makes the current one special is that it will be the last one of the five-month consolidation area.  Since price continues downward after one of these lines is broken, we can assume that if it is, SPX will, at least, retest its 2040 support and perhaps even break it.  If so, the next support may well be the lower blue trend line which is the lower channel line (around 2020) of the intermediate channel which is displayed in the insert.

I had mentioned previously that for most of the last two years, SPX had shown exceptional strength by trading in the upper half of its intermediate channel.  When deceleration set in, it still used the mid-channel line for support until it broke through it decisively in the last decline.  The relief rally reversed right on that mid-channel line, suggesting that prices could now start trading in the lower half before eventually breaking through the trend line.

All the indicators have turned down and the Mcould make a bearish cross as early as Monday.  The A/D indicator has been much weaker than the other two and has almost reached its oversold level.  There is no suggestion on this chart that this decline is over but the oversold condition of the A/D could lead to a minor bounce.

On the Hourly chart we can see how the index stopped its rally just under the top green parallel line.  When the decline started, it found temporary support on the next longer green line and with the bottom of the small blue channel.  It did not tarry there very long and when these gave way, a quick drop followed.  SPX could find some support for a bounce at the top of the congestion pattern to the left as well as on the lower green trend line. 

Note how the decline is similar to the previous one:  a gradual descent for the first wave down to the green trend line, then a sharp drop after it was broken.  If the similarity continues, an oversold rally should take place followed by a continuation of the correction to the bottom of the trading range.  There could be some holding at that level after a decline of this nature, but if no significant uptrend takes hold, we should look for a break of the 2040 level and its consequences.

The momentum indicators closed the week very oversold and the A/D indicator (which is also oversold on a daily basis) is already showing some positive divergence.  A corrective bounce could be right around the corner.

Dow Jones Composite Index

“When the rally started, the Dow Jones Composite Index was in a more pronounced decline than

the SPX and, although it too broke out of its downtrend channel, it was only by a slight margin.

If the SPX makes a new high, it will have a hard time following suit.  So, which is telling the truth

about the overall market trend, SPX or Composite?” 

After last week’s market action, my bet is on the Composite!  I believe that I also pointed out that its rally was showing a loss of momentum and that it had failed to reach to its 200-DMA.  Note, also, that it broke its intermediate-term trend line which connects with the October low.  It has also retraced more of its rally than did the SPX.  All this points to the fact that it continues to be the weaker index leading to the downside. 

The MACD just made a bearish cross and the RSI is showing no sign of making a low. 

SMH – IWM – QQQ

“The various trends that exist in the market are portrayed perfectly in the following three charts.”  Maybe they are just starting to line up – to the downside!  All three indices took a hit last week with the weakest leading the others, although IWM may be catching up.  QQQ still has its head in the clouds, influenced (distorted) by the high flyers which had a ridiculous move after their earnings report. 

UUP (dollar ETF)

Unless UUP has a sharp up-move soon, it is going to retrace one more time before attempting to resume its uptrend.  It made a doji a few days ago and is beginning to trade below its shorter MA.  It will have to hold above the blue one if it is to continue up right away. 

GLD (Gold trust) 

Instead of being obedient, GLD is going to be difficult!  It has a well-defined projection to 100/101, but instead of going straight to it in a selling climax, by making a bullish engulfing candle on Friday, it may want to reverse from 104 (which had been a former projection).  Even so, it is possible that this is only a consolidation followed by the final drop to the 101 target.  Its indicators are not yet suggesting a serious reversal.

USO (US Oil Fund)

USO continues to decline and is now challenging previous support.  Should it break, it will be another sign that it may try to fill its 13 projection, but could stop at 15. 

Summary

Last week, I mentioned that the technical aspect of the rally left something to be desired.  This was proven correct by the SPX action in the past week.  With the technical deterioration not only continuing but increasing, the 1040 level which has confined prices to a trading range may soon be jeopardized. 

For the moment, a short-term oversold condition should soon lead to a bounce, and this is where we will see how much strength the bulls still have in reserve. 

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