Decision Point!
Market Overview
Last week, I mentioned that the market would clarify its intentions by its
behavior in the coming week (last week). This is what I wrote in the
Market Summary for Thursday evening:
Today’s market action:
“We have reached a point where we could get a reversal, temporary, and
then extend the uptrend, or one that could finish the move entirely and lead
us back down to the former lows. There are three reasons for this: 1)
Basic projections 2720-2730 have been reached. 2) I have developed
negative divergence at the hourly level. 3) a cycle low is due next
week (rather than Friday/Tuesday).
Arguments against: 1) there is a good projection to 2760
and, since we have already gone beyond 2720, it’s possible that we have
formed a larger base in a V-shape, which could even carry us back up to 2900
after a short-term correction. Furthermore, I do not have any
distribution pattern at the current level. 2) Although there is a
good probability that the hourly indicator will give a sell signal, and the
daily indicator is still in a sell position, if we only have a short-term
correction with limited downside (… points), followed by another buy signal
at the hourly level, the daily indicator could then be in a position to give
a buy signal. Furthermore, the daily A/D indicator has given a buy
signal and would have to be neutralize by a sell signal. 3) I am not
sure of the strength of the cycle due over the next few days, but there other
cycle lows due at the end of the month, and another cycle low due in
mid-March.
There is another alternative: We get a short-term sell
signal, go up to 2760, then start a potent retracement. This would give
the daily A/D indicator a chance to give me some negative divergence at the
next top, as well as build a distribution pattern. This may turn out to
be the preferred scenario because of the cycle lows going forward!
Also, the 40-week cycle has already peaked and its low is due in mid-May,
which does not favor a new high at this time. Let’s see what happens!”
What happened Friday: Instead of pulling back from
2730, SPX went directly to meet the higher projection before starting to
retrace. (To be continued in the chart analysis section.)
Chart Analysis (These charts and subsequent
ones courtesy of QCharts)
SPX daily chart
The rebound from the 2540 low retraced about .618 of the initial decline
when it reached 2754 on Friday. Since this matches a P&F projection
count given by the base established at the low, it’s a pretty good
guess that we have reached the top of the six-day rally . As we will
better see on the hourly chart, the market behavior after reaching the
projection and going into the close appears to confirm it.
In addition, as stated in the Market Summary comment, a cycle low is due
next week, and several others are due going into March. This should
indicate that the initial pull-back will be minimal, and perhaps followed by
a period of distribution into the end of the month. After that, the
March cycle could take us to a new short-term low. What happens after
the March low will decide if we continue to rally to a new high, or whether
the pressure from the 40-week cycle (which is in a declining phase until May)
will prevail and send us down to retest the 2540 low, and possibly
lower.
It would not take too much to get a buy signal in the daily
oscillators. A pull-back followed by a good enough rally could get them
in a buy position which could then extend the move beyond 2754.
SPX hourly chart:
Besides reaching P&F Projections verified by a .618 Fib retracement,
the index met with resistance when it touched the 233-hr MA. This
caused the price to reverse, break the trend line as well as its shorter MA
(which has been a good indication of buy and sell signals in the past), and
start to decline into the close. The A/Ds lost two thirds of their
gains, also suggesting selling pressure.
Of the two oscillators, the SRSI – which always leads – has already given
a sell signal, and the CCI, which recently showed negative divergence
as the index approached its high point, is also on the verge of giving
one. For confirmation, it needs to break its trend line – which
normally confirms the breaking of a price trend line– and become
negative. Since we are expecting a cycle to bottom early next week,
assuming this is correct, we should expect a weak opening on Tuesday.
There are a couple of things which the index must do to signal its
intention to continue its rally: 1) It must remain above its blue MA as
it consolidates its gains, and 2) it must rise above the red MA after that
consolidation. A buy signal must also be generated by the daily
indicators.
An overview of some important indexes (weekly charts)
The FAANGs (which appear in the top tier, in the proper order) reacted individually
to the correction, with Facebook being the one the most affected, along with
Apple and Google. But Apple has had by far the best recovery of the
three, and Facebook the worst. Netflix could be ready to make a new
high!
The bottom tier probably has a better record as market leaders, and the
consistent star among them has been TRAN (third from left). It topped a
week or more before all the other indexes shown, except for AAPL which topped
at about the same time. Its weak recovery could be a concern about the
current state of the market. Note that, along with Facebook, it has had
the worst rebound, not having been able to rise above its blue MA. It
will bear watching how it performs during the coming pull-back. ]
UUP (dollar ETF)
UUP has resumed its decline and looks destined to make new lows --
probably down to about 22.50, at least, where the top of the 2011 base should
start to offer some support.
GDX (Gold miners ETF)
Erik Hadik has mentioned a 18-20 week cycle in GDX, so it’s possible that
this is what caused the severe retracement of GDX down to 21 (I had the 20-wk
cycle bottoming about next week). Whatever it was that drove the index
down to that low, in conjunction with a dollar spike rebound, it is behind
us, and last week’s pull-back appears to have been caused by resistance met
around 23.00. So far, it has not affected structure, which remains
bullish as long as we can rally without going much lower, first. I had
mentioned last week that the decline to 21 had ruined what was the formation
of a good-looking base pattern. The rally to 23 followed by a pull-back
to 22.50 has somewhat repaired it, and if we can get to 24 on the next rally,
it would prepare for a reversal on the 3X chart which did not suffer from the
pull-back to 21. A little more time is needed to see if GDX can get to
24+ over the next week or so. Printing 25 would most likely cause
a break-out of the established base.
USO (United States Oil Fund)
USO is correcting its advance from 8.65. It has found support where
it should have and rebounded, but may have to do some additional
consolidating before it can move higher.
Summary
After rallying from its 2540 low as quickly as it came down, SPX completed
a .618 retracement of its decline and looks ready to move down again.
Since there is no distribution at its last Friday high, it is possible that
it will have to create some if it is now ready to retest its low. It
could also simply consolidate and move higher from here, although a new high
may have to wait until after the 40-week cycle makes its low in May. We
need more time to clarify the market’s intention!
By Andre Gratian
