Market Turning Points

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 (after this bull market is over) there will be another steep and prolonged decline into late 2014. It is probable, however, that the severe correction of 2007-2009 will have curtailed the full downward pressure potential of the 120-yr cycle.

SPX: Intermediate trend - SPX made a top at 1474 and is engaged in an A-B-C intermediate correction. Wave "B" was completed at 1448 and wave "C" is now underway.

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.

Market Overview

Since SPX reached 1448 on 12/18, it has been declining. Until last week, it was not certain that this would be the top of the move from the 1266 low. Thursday gave us the first hint that we had started a serious decline, but even then, after a 20-point drop, the index rallied to close down marginally for the day, desperately trying to hold on to an important level which, if broken, would confirm that an important decline was underway. Friday no longer left any doubt. We can now state positively that 1448 was the top of wave "B" of an intermediate A-B-C correction which started on September 14 at 1474. This decline has a reasonable chance of reaching about 1320 sometime in early February before it is complete. We will reassess this target as we near it. We should be able to make some confirming projections in the late stages of the decline.

As stated in the last letter, we should keep in mind that this could be more than an intermediate correction and the beginning of a bear market which could last until October 2014, but there will be plenty of time to examine that premise. At present, this not the favorite scenario.

Wave "C" is underway but, like all larger market moves, it will consist of several phases of short-term declines and counter-trend rallies before it is complete. We are currently very close to completing the initial down phase with projections ranging from 1386 to 1397. It is also possible that the SPX will make a short-term double-bottom at 1402 (where it closed on Friday) if a deal about the fiscal cliff impasse is struck over the weekend.

Chart Analysis

We start by analyzing the daily SPX. The blue trend line from the October low was broken decisively at the same time as the 200-DMA in mid-November, but a strong rally put the average back above both and brought into question whether or not a top had been made in September. It is not until the short-term green trend line was broken, and the blue trend line re-broken that a reversal appeared convincing. Finally, on Friday, a close well below the horizontal red line clinched 1448 as the top of wave "B". A near-term rally failing to make a new high would be a double confirmation.

The indicators also gave a sell signal when they rolled over and the lower one went negative. The long horizontal green line represents potential support (which it has provided before on several occasions) and, with the index very oversold short-term and approaching near-by phase counts, it could end the first down phase of wave "C". That would, of course, imply that there is a positive outcome of the Washington weekend negotiations. If there is none, 1386 -- slightly below the 200-DMA -- would probably be the next stopping point.

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I have drawn a trend line across the two tops and a parallel to it from the 1343 bottom. That represents the potential path which will be taken by the SPX as it continues its correction, probably ending it at the lower channel line. Doing so would almost ensure that this correction is of an intermediate nature. Should prices drop below the channel line -- and especially below 1266 -- we would have to shift our forecast to the likely start of a new bear market.

Let's next try to anticipate the end of the first phase with the help of the 60m chart. I have kept the same trend lines that were drawn on the daily chart. We can see more clearly that the green support line runs at about 1396, which corresponds to the 1397 P&F projection mentioned earlier.

Note how the former low (marked by the red horizontal trend line) corresponds to the 200-hr MA, making it a strong short-term support level. This is why the index tried to hold there and why, now that it has been overcome, there is a very good chance that we have started a longer-term decline.

Coming back to support, projection targets, etc..., if you look at the hourly indicators at the bottom of the chart, you will notice that there is strong positive divergence in both. This divergence is even more discernible in the A/D oscillator below which has already been rising for 5 days while the market continued to drop for another 25 points. This suggests that a near-term reversal is imminent.

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Cycles

For a while, we have been looking for the declining 66-week cycle to reassert itself and lead the market lower into early 2013. I think that it is now clear that it has regained control.

There is also a 3-wk cycle which is due to bottom in a couple of days and could very well have made its low early, on Friday.

Breadth

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

In the last letter, I mentioned that all the indices would start rolling over as soon as the NYMO turned negative. Note, however, that the latter is now at a level where support has caused it to reverse temporarily on many different occasions. This should add to the perception that we have arrived at (or are close to) the end of the first down phase of the "C" wave.

Sentiment Indicators

The long-term indicator of the SentimenTrader (courtesy of same) has hardly moved, but the short-term scenario is suggesting that a bottom is near -- in sync with other indicators mentioned above.

VIX

This indicator has been signaling for some time that we were at a potential reversal point, and each day it reiterated that forecast. What happened on Friday should leave no doubt that we have now started a decline of substance and we have to wait for VIX to warn us when we are approaching the bottom of the move. There appears to be some discrepancy between final quotes of 21.29 and 23.72 which should be sorted out on Monday.

This indicator moves in reverse of the market and the higher it goes, the lower the market goes. In 2009, it reached 48. We don't expect anything close to that on this move - unless we have started a bear market. Its first projection was to 21 which was achieved on Friday (and is another reason to expect a short-term reversal to take place around here). The next target is 23 and the following one 26. If that figure is exceeded, the odds of having started a bear market will begin to increase.

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XLF (Financial SPDR)

This index also normally warns of reversals, but not this time. It rode the rally beyond the date on which the SPX made its high of 1448. Not only that, it even surpassed its September high before giving up the ghost! That gives it positive divergence on an intermediate basis and this is not the way that bull markets normally end, which is why I believe that this is only a temporary market correction and not the end of the move from 2009. Something to keep in mind as we attempt to read the long term tea leaves.

As for the short-term, XLF appears to be two weeks behind SPX and could be making a totally different structure than the latter. If it is currently in the "C" wave of an A-B-C correction, then it is most likely making an irregular corrective pattern. But I'll let the EW experts decipher that. My expertise in that methodology is limited.

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BONDS

Rather than drawing a conventional channel around the weekly price movement of TLT, it seems to adapt quite well to an Andrew's Pitchfork, so we'll monitor its long-term move with that method.

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The long-term trend from the 2009 low appears to still be positive and should continue to be until the price moves out of the lower channel. It is still too soon to tell if 132 was the top of the move, or if a new high is in the offing. A test of the high, at least, is likely.

GLD (ETF for gold)

Gold filled its 159 projection, at the same time reaching the next support level and bouncing off it. Since there is a slightly lower count to 157, it is possible that GLD will still reach it in conjunction with the market decline in spite of the fact that the 25-wk cycle should now have made its low. There is a shorter 9-wk cycle which is due next week. After that, GLD will have a chance to tell us if it wants to continue its long-term uptrend or if it needs more consolidation. It may even be possible that a longer decline to new correction lows is in store for this index. The weekly chart does not show that it is ready to support a substantial uptrend.

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UUP (dollar ETF)

UUP has been in a corrective mode since July. It usually moves in a direction opposite to the market's. When SPX touched 1474 and started to correct, UUP rallied. When SPX started a "B" wave rally, UUP declined again, finding support for the third time at about 21.60. Now that SPX has started the "C" wave of its intermediate corrective pattern, UUP has started to move up once again. Although it may have to expand its base a little more while the market has a counter-trend rally, it should move higher into the February time frame while SPX completes its correction.

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USO (United States Oil Fund)

USO continues to consolidate before moving lower. While there has been some minor improvement over the past month, it does not appear to forecast the beginning of a significant uptrend. If USO attempts to go a little higher, it will run into the red internal trend line which has consistantly provided resistance in the past.

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The bounce of the past month is most likely due to the decline in the dollar. If the dollar stabilizes and starts to rise, USO should do the reverse.

Summary

The SPX has essentially confirmed that 1448 was the top of the "B" wave of its intermediate A-B-C corrective pattern. The first phase of wave "C" is nearly complete, with hourly indicators showing positive divergence and price projections a few points away.

The beginning of a near-term countertrend move could come at any time, most likely depending on an announcement from Washington that a short-term solution has been reached.

I want to wish to all my readers

A HAPPY, HEALTHY AND PROSPEROUS NEW YEAR