READY FOR A PAUSE? Market Turning Points

October 16, 2011
Market Turning Points
By Andre Gratian

READY FOR A PAUSE?

Precision timing for all time frames through a multi-dimensional approach to technical
analysis: Cycles – Breadth – P&F and Fibonacci price projections
and occasional Elliott Wave analysis

“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: Very Long-term trend – The very-long-term cycles are down and, if they make their lows when expected, there will be another steep and prolonged decline (which appears to have already started) into 2014.

SPX: Intermediate trend – A very strong uptrend typical of bear market rallies has begun. However, the existing pattern suggests that a correction is due.

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.

Daily market analysis of the short term trend is reserved for subscribers. If you would like to sign up for a FREE 4-week trial period of daily comments, please let me know at [email protected]

Market Overview

We’ve got ourselves a rocket-propelled uptrend! In nine daily trading sessions, the SPX has tacked on 149 points, or almost a 14% gain. You’d think that we had started a new bull market but, considering the major cycle lows that lie ahead, that’s highly unlikely, and we are probably only experiencing a very strong rally in a bear market. As anyone who has followed the stock market for a while knows, bear market rallies are supposed to be fast and furious by nature, and this one is taking place in an extremely volatile period, so perhaps we should not be so surprised at its velocity.

In spite of this, we can still make sense of where we are and what is likely to come next. The structure appears to consist of five waves from the 1075 low, with the index now completing its fifth wave. If this is correct, the entire move would be wave A of the upward correction, and we should be on the verge of starting wave B.

The Point & Figure charts seems to support this analysis. The base pattern — including a small extension — gave us a projection to 1171. This is where the rally paused after completing wave 1. Wave 2 formed a re-accumulation pattern which provided a count to 1221, with a possible extension to 1230-1233. Wave 3 stopped at 1220, giving way to a wave 4 correction. When that pattern was completed, we had another projection to 1223 with a possible extension to 1230-1233 (which matched the count across wave 2). Incidentally, there is also a potential base extension count to 1224 which is well defined and which could turn out to be important.

On Friday, the index closed on its high of the day at 1224, intimating that it may not be quite ready to pull back before attempting to meet a final target of 1230-1233. This could happen on Monday morning, and if it does, we should be ready for the beginning of the most serious retracement since the beginning of the move. If the market decides not to go beyond 1224, it will not invalidate the structure or the projection. However, if we go substantially beyond 1233, some adjustment to the analysis will have to be made.

Besides completing the structure and reaching the target, there are several other coincident technical aspects that argue for an important pause in the rally at this time.

- On its way down to 1075, the index made an extended consolidation of several weeks. The top of that consolidation was 1230.71, and any rally to that level should expect to meet with at least temporary resistance, especially since it corresponds with a short-term high in November 2010 and also matches the P&F projection!

- The move from the low of 1075 to 1231 represents a retracement of slightly over 50% of the entire decline from 1370.

- The 200-EDMA of the SPX is currently at 1234. After a move of that extent, it is not likely that the index can shoot through its 200-EDMA without some consolidation.

– As you can imagine, the daily indicators are severely overbought with the MSO at 100%, and the A/D oscillator is in an area from which it normally retraces.

– All the hourly indicators are showing negative divergence.

– The 17-week cycle is expected to make its low next week. The effect of this cycle on the stock market is not consistent, varying from a small ripple to a sizeable move. In this case, if the SPX does top on Monday, it could bring about a significant initial correction.

– Finally, on Friday, my leading indicator started to show some negative divergence to the SPX on an hourly basis. That is only the second time that it has happened from the beginning of the rally. The first was during the wave 2 consolidation.

Taken all together, these are good reasons to expect a pause in the rally.

Let’s look at charts!

Chart analysis

We’ll start with the Daily Chart of the SPX.

The index is trading in an intermediate down-channel and, since making its low at 1075, has been in a sharp counter-trend rally which is close to challenging the top trend line of that channel. It is not expected to move out of it at this time but, after a correction, will probably go though and at the same time surpass its 200-EMA.

At its current level, the index faces some serious resistance from previous tops and from the 200-EDMA, while the indicators are very overbought. Because there were only minor consolidations along the way, the MSO does not show any negative divergence, but the A/D oscillator is beginning to.

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