Market Overview:
After the 20-wk cycle made its low, a little ahead of its normal schedule,
there was a rip-roaring rally at the beginning of last week which undoubtedly
caused many to doubt that something serious had started, and thought that the
market was ready for another new high. But by the end of the week, reality
should have set in that something more than a short-term dip was occurring.
EWT aficionados warn that 4th wave corrections, especially those of higher
degree, can bring a lot of volatility, and this is certainly the way that
this correction has started. It can be confusing!
Whether or not the future brings more swings of this magnitude, only the
market knows. However, it always tips its hand by making moves proportional
to the amount of distribution or accumulation which has taken place prior to
the beginning of the trend. At the very top of the market, there was enough
distribution to create a P&F count to much lower levels than those
already reached. But we may have come to a point where a shorter-term count
has already been filled, and a base is already forming for the next
corrective rally. If we hold this level early next week, we should get
another relief bounce. The positive divergence which is forming in the daily
and hourly indicators is certainly suggestive of that, and all we need is
confirmation by resisting further selling and getting started on the upside.
Analysis: (These Charts and subsequent ones courtesy of
QCharts.com)
Daily chart
The 20-wk cycle found support on the intermediate, blue mid-channel line
for the fourth time since April, but it was for the last time. On Thursday,
that support was finally breached with some downside follow through on
Friday. For the first time since March, we have made a
lower-low/lower-high/lower low sequence and, by definition, we are now in a
downtrend until the process reverses itself. We have already defined a
short-term channe, and prices will remain in the current downtrend until they
break above the top channel line. Even if they do, they would have to rise
above last week’s high of 2474 to attempt reversing the current downtrend
pattern. This is the simplest -- but very effective -- way to analyze the
market trend.
If we are really in an intermediate downtrend, the next step will be to
drop below the former short-term low of 2405 (red horizontal line). This
would cause breaking a former low of a higher degree than we have already
done, and it would be the confirmation we need to suggest that a more
important correction
than any we have seen since early 2006, has started.
That does not mean that we are going to do this right away. The index may
resist going lower for a little while longer. Friday’s action suggests that
we may have started to build a congestion pattern which will temporarily
reverse the current downtrend. This is supported by positive divergence
beginning to show in some of the daily and hourly indicators. If so, there
may already be enough of a base to give us a good bounce before we make the
next lower low. This will have to be confirmed by market action early next
week.
(Click to enlarge)
Hourly chart
The index found support at the bottom of a channel, rallied, and sold off
again at the close on Friday. The index appears to have completed a
corrective pattern at Friday’s low and is in the process of retesting that
low, before starting a move up on Monday -- which would confirm that view. If
so, the next rally could take us back to the top of the channel and confuse
the bears once again.
Friday’s decline filled a count taken across the congestion level at the
2468 top ,which increases the odds that Friday saw a low and that we are
ready to rally toward the top of the channel or a little higher. But since a
lower count was established at the very top, we want to make sure that we do
not first make a new low before rallying
The pattern looks complete and is getting some assistance from the daily
indicators, especially the A/D oscillator, which is showing strong positive
divergence. However, we want to make sure by also having a quick turn in the
hourly oscillators which I may have prematurely marked with positive
divergence.
(Click to enlarge)
An overview of some important indexes (daily charts)
All the indexes below show that a correction has started. This time, it’s
unanimous. The leaders are, as always, TRAN and IWM (second and third from
the left, bottom row) although you can make a case for SMH (top right) to be
the first to establish a top. Until we see some signs of reversing, we can
assume that the correction is still in progress.
(Click to enlarge)
UUP (dollar ETF)
Since making its low at 24.98, UUP has made a limping recovery which does
not impress. At best, it is the beginning of a basing process, and at worst,
a consolidation in a downtrend.
(Click to enlarge)
GDX (Gold Miners ETF)
GDX has followed the 9/10-wk cyclic rhythm to a “T”. The current rally
looks less vigorous than the previous three as price coils into an apex. It
has been unable to get past the 23 level, and since it is now past the peak
of its rhythmic pattern, the odds are rapidly increasing that it may have to
pull back one more time into the next cycle low before starting anything of
consequence.
(Click to enlarge)
Note: GDX is now updated for subscribers throughout the day, along
with SPX.
USO (United States Oil Fund)
USO may have found a low at 8.65 which will soon enable it to challenge
its secondary corrective channel top. A consolidation of a few more days just
below the top channel line, which holds Thursday’s low, would be a good
set-up to push it through its 233-DMA as well.
(Click to enlarge)
Summary
One could argue that we will not have absolute confirmation that an
intermediate downtrend has started until we drop below 2405, and that would
be reasonable. That level could, in fact, hold the decline in check for a few
weeks, as volatility continues to be the dominant pattern. However, the odds
that the index will eventually retrace to much lower prices by October is
still on the front burner.
By Andre Gratian for Safehaven.com
