Technical Analysis Of The Markets

Current Position of the Market

SPX Long-term trend:  The 4540 projection which had been in effect since the March 2020 low has now been reached, but it is too early to call for an end to the bull market which started in March 2009.

SPX Intermediate trend:  An intermediate correction has started.  Let’s see if it evolves into something more serious.

Analysis of the short-term trend is done daily with the help of hourly charts. They are important adjuncts to the analysis of daily and weekly charts which determine longer market trends.

New Intermediate Bottom Forming?

Cycles:  Looking ahead!

7-yr cycle – Last lows: 2009-2016.  Next low:  ~2023

Market Analysis (Charts, courtesy of StockCharts)

SPX daily chart

When SPX made its high 4546 in early September, it filled a March 2020 base count which could prove to be either an intermediate count or a long-term count, depending on the market action subsequent to having achieved this projection.  The formation created at the September high carried a short-term downside target minimum of 4300 and 4230 maximum.  Until last week, the index kept us in suspense as to which would turn out to be the correct one, but with the market strength of the past week, the odds that we will see the deeper penetration have pretty much been eliminated.  Even though a short-term cycle low is expected on about 10-22, it is unlikely that it will exercise enough downside pressure to take SPX down to 4230.  Consequently, the low of 4279 which occurred on 10/04 is likely to be the low of the correction, and whatever weakness we experience over the next week or so caused by the bottoming of the short-term cycle should keep the price above 4279. 

The pullback from the recent 4546 high was expected to be at least of intermediate nature.  But what constitutes an intermediate correction is subjective!  By the time the next short-term cycle makes its low, this correction will have lasted almost two months; and it is possible that the correction will be extended for another month, into late November.  So far, the base created by the index does not look capable of exceeding the former top by more than a few points, but that may change after we see what kind of pattern has been produced by the price retracement into 10/22.  In any case, the forecast made after the previous high was that we would see the largest correction since last November, and that’s what it has already turned out to be. 

So, if 4546 was only an intermediate top, where is the top, top, before we decline into the 7-year cycle? It is possible to extend the March 2020 SPX base count legitimately so that it would extend to a minimum of 4900 and a maximum of 5320; but that would have to be confirmed by the P&F pattern which is currently under formation.  A more definite assessment should be possible by the end of November.  A move higher would extend the primary trend into February or March of next year. 

DJIA daily

Last week’s chart of the DJIA has been completely modified by its action over the past two days of trading.  In the last letter, we were trying to determine whether the Dow would make a new low during this short-term cycle with such action deemed to be bearish and increasing the potential for an important top.  After the last two days, we can safely say that such a possibility has been averted. 

Also, I had mentioned that the DJIA’s action had more influence on the SPX than NDX.  On this chart, we can see clearly where the SPX strength came from.  By comparison, NDX grossly underperformed both DJIA and SPX over the past few weeks.

SPX hourly chart

What a difference two days make!  When the index came out of its short-term corrective channel, price exploded upwards.  We know that sudden market moves are associated with news that acts as a catalyst, causing a sudden buying and short-covering spree.  In this case, the gap out of the channel was the result of better-than-expected earnings reported by the major banks, which was taken as a sign that the economic recovery process was still on course, especially since concurrently, there are signs that the worst of covid19 may be behind.

But that surge is probably over!  If you look at the chart below, you can see that Friday’s progress was more labored, suggesting that more sellers were appearing on the scene and that the rally might soon have run its course.  This is also suggested by the negative divergence that was formed in the CCI and further supported by the fact that the rally from the 4330 low was a measured move, or a precise match for the one which took place from the 10/06 low. At 4470, SPX also filled a P&F count taken at the very base of the correction, although the pattern does allow for thirty more additional points if we include a “weak” count in the existing base.  But that is a “weak” possibility!  Nevertheless, only a reversal to the short-term trend will determine that the rally has come to an end.

USD dollar daily

USD is struggling to move out of its corrective channel and push above a previous short-term high but doing so, it would encounter increasing overhead resistance.  Nevertheless, it still has the potential to move higher to ~95 (P&F) or 96.50 (50% retracement). 

GDX gold miners daily

GDX has already moved three points off its recent low, but it may find it difficult to make more progress before retesting that low.  A retracement would also benefit the P&F by creating the base which is currently lacking.

PAAS daily

PAAS has also moved out of its corrective channel after some price deceleration.  Like GDX a pull back would be constructive, but beyond that, the stock will run into some serious overhead resistance starting a couple of points higher.  Neither PAAS, nor GDX appear to have the technical foundation which would allow them to make a major bullish move at this time. 

BNO Brent oil fund daily

BNO has filled a short-term P&F projection to 22 and is showing plenty of negative divergence in its indicators, both of which suggest an imminent reversal.

SUMMARY

Last week’s strength in SPX -- primarily the result of a strong DJIA while NDX is lagging -- suggests that a deeper correction has been averted at this time and that the index made a low ahead of the short-term cycle bottom scheduled for 10/22.  It is also likely (but not yet certain) that Friday’s high will be followed by a retracement into that date.

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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 of view which might be of interest to those who follow stock market cycles and technical analysis.

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