Market Turning Points

Current position of the market

SPX: Very Long-term trend – The very-long-term cycles are in their down phases, and if they make their lows when expected, there will be another steep decline into late 2014.  However, the Fed policy of keeping interest rates low has severely curtailed the full downward pressure potential of the 40-yr and 120-yr cycles.

Intermediate trend – May be tracing out an ending diagonal pattern.

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. 

MINOR CORRECTION UNDERWAY

Market Overview

As expected, a minor top has formed as a result of a number of cycles cresting simultaneously in this time period.  SPX has already corrected about 30 points, finding support at a pivot point.  On Friday the index had a weak oversold bounce which could signal the end of the correction but, while the hourly indicators rallied, the daily are still in a downtrend, which is a warning that the correction may not be over and that Friday’s action could be only a pause in a larger downtrend. 

If the correction continues, SPX will be challenging an important band of support which has formed between 1916 and 1926.  The index touched the top of that area on Friday and rallied.  If it decides to go through the support, the next pivot point is at 1901 which, as we will see on the next chart, is near the lower channel line of the move which started at 1815.  A sign that this level may not hold is that the DOW industrials have already had a deeper correction than SPX and destroyed some of that support. 

Our “weak” leading indexes displayed a mixed performance during the rally which took SPX to new highs.  QQQ was by far the best performer, actually registering a new bull market high, as did XLF.  IWM also rallied well, but stopped short of its former high by a good margin.  As for XBD, it showed the least interest in the rally and its performance suggests that it may be taking on the role of canary for the next serious correction.  I will keep a close eye on that one!  I am also closely watching the weekly SPX index for signs of intermediate weakness.  Already the action of its oscillators is becoming interesting.  They will become even more so if our ongoing correction extends into the projected lows of some of the cycles which topped last week.  Three of them will be bottoming between the end of June and the middle of July, creating a risk that downward pressure for the current correction could be extended into that time frame.  

Chart Analysis

We’ll start our analysis with the daily chart of SPX (courtesy of QCharts.com).

I have drawn several channels to facilitate keeping track of the trend. As you can see, we started another up-phase at 1738 which now consists of two separate phases.  Both phases fit within the blue channel.  They are outlined by green channel lines.  We will now focus on the second phase which may have come to an end on Friday after reaching the top green channel line.  There are also some internal trend lines drawn within the green channel that will be discussed in the context of the analysis.  First, we have the lines forming a narrow up-channel from 1862.  The correction has already moved well outside of that channel and come to rest at the junction of two trend lines:  one is the extension of the trend line which connects the 1814 low and that made on 5/07.  The other is a parallel to the larger blue channel lines drawn across the 1842 low.  These intersecting lines add their support to the top of the trading band from 1916 to 1926.  It’s no wonder that the index bounced after reaching 1926. 

It’s also a reason to expect more correction if prices fall below 1926.  What are the odds of this happening?  Considering the state of the oscillators, I would say pretty good!  The lowest one is the A/D oscillator.  It helped to identify the top of the move by displaying negative divergence while the SRSI (middle) had been in an overbought condition for about two weeks.  Since giving a sell signal, both have come down sharply, but do not look ready to turn up.  Also, the MACD – which has started a downtrend – looks ready to make a bearish cross.  If it does, it will suggest that the downtrend may just be getting started. 

Let’s get a close-up of this downtrend by looking at the hourly chart (also courtesy of QCharts.com). 

The same channels and trend lines drawn on the daily chart are shown here also.  Those of current interest are the ones mentioned above which intersect where the SPX found support on Thursday.  They helped the index find support exactly at the top of its previous congestion area.  On Friday, prices bounced at the opening and then went into a sideways consolidation for the rest of the day.  In the last hour the index attempted to move higher, but bumped its head on the heavy red downtrend line.  An attempt at selling into the close was defeated, once again, by the two intersecting trend lines and this prevented prices from declining into the close leaving us having to do some guess work about Monday morning.

The oscillators are in a mixed uptrend:  the MACD has not yet made a bullish cross, the SRSI is still moving up and the A/D oscillator histogram has started to roll over.  Undoubtedly, traders were reluctant to do anything before the weekend, waiting to see if the news background improves or worsens.  So far, neither Ukraine nor Iraq has caused them to sell heavily with only oil being the most affected.  There are two other situations coming up which could also have an effect on the market:  the Fed report in the middle of the week and options expiration at the end.

Returning to the chart, the opening should decide if the correction is over and the uptrend resumes, or if it continues.  A third option will be to continue consolidating before doing either of the above.  Because of the state of the daily indicators, I believe that the second one has an edge over the others.                                                      

Cycles 

After the 6-wk cycle, which is now in a downtrend and scheduled to make its low in a couple of weeks, the one which may influence the market the most is the 22-wk cycle which should bottom about two weeks later.  The current cycle configuration definitely favors a continuation of the correction, perhaps even into the middle of July. 

Breadth

The McClellan Oscillator and the Summation Index appear below (courtesy of StockCharts.com).

The McClellan Oscillator has not been able to achieve steady upside momentum since the middle of April. But neither has it been able to retrace very deeply either.  This could change quickly now that the NYSI has just turned down from an overbought position in its RSI before being able to surpass its March high.  Since SPX has tacked on another 60 points from that date, some serious divergence has now developed between the summation index and the SPX and NYA.  With the NYMO having made a short-term low after going negative, it puts the market in a precarious position.

Sentiment Indicators

The SentimenTrader (courtesy of same) long term indicator remains at an elevated reading of 70 for the second consecutive week.  Considering the technical condition of the market, especially of the A/Ds, caution is definitely warranted.

All of the following charts are courtesy of QCharts.com

VIX (CBOE volatility Index)

After making a 5-year low, VIX bumped up past last week’s high!  While this can hardly be considered a significant accomplishment, it is the first time since mid-April that VIX has been able to exceed its previous near-term high.  Viewed from that perspective, this could be a bigger deal than it appears to be!

XLF (Financial ETF)

In spite of making a new high, XLF could not hold on to its gains and gave back some of them in last week’s correction with Friday producing less of a bounce than it did in the SPX and the index closing unchanged.  This could have some bearish significance.  We’ll find out Monday.

Another thing is that prices found resistance at a parallel to its lower trend line which has served as support for quite a while and now appears to be providing resistance instead; this is a sign of increasing price deceleration. 

TLT (20+yr Treasury Bond Fund)

The weekly chart of TLT gives us a good perspective about its long-term activity.  After establishing a substantial base in the 85-90 area, TLT made a rapid advance to about 123 which could not be sustained, and it dropped back into the base for some additional bottoming action.  In January 2011, it finally moved out of the base decisively and established an 18-month uptrend which took it to 132.  From that level, it reversed its course for an equal amount of time, finally finding good support just above the 100 level. 

Since the beginning of the year, it has tried to re-establish its uptrend and is now challenging the top of its correction channel.  Although it went through it by a small margin, it has not given conclusive evidence that it can move out of it before having additional consolidation around this level.  However, it does seem as if it is only a matter of time before it starts to move higher.  It faces considerable resistance from 115 up, but should nevertheless be able to rise to a higher level and perhaps try for a new high.  Time will tell whether or not it is successful in doing so.

GLD (ETF for gold)

GLD is in the process of establishing what could be a triple bottom – which may even turn out to be a valid inverse H&S pattern.  If so, the right shoulder should be (just about?) complete since GLD is now in the vicinity of its 25-wk cycle low.  With this cycle ready to turn up, it has an excellent chance of rising above its 200-DMA and breaking out of its downtrend.  A move above 130-135 in the early part of the cycle’s up-phase could lead to a substantial price increase, since the past year was used to build what could be an important base.  We’ll get into specific projections once it has proven itself capable of attracting strong buyer interest.

UUP (dollar ETF)

Since the dollar is on the same cycle as gold (but inversely) it has essentially run out of time to break out of its down channel.  If this is a cycle top and the index starts down, it will be displaying left translation, a sign of weakness that could easily lead it to new lows in the weeks ahead.

USO (US Oil Fund)

USO has benefitted from the conditions in Iraq and has risen above its resistance line.  It is now ready to challenge last September’s top and, if successful, the top of its rising channel.  Even if this were accomplished, it would still be far below its bull market top of April 2011, and it is doubtful that it could progress above 41 before falling back again.

Summary

The anticipated short-term peak in prices has now shaved off 30 points from the SPX’s 1955 all-time high which occurred on 6/09.  Because of the market’s current cyclical configuration and its technical condition, there is a good possibility that last Friday’s pause in the decline was just that, and that new correction lows lie ahead. 

Monday’s price action should clarify the market’s near-term intentions.

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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.