Archive for the technical analysis Category
In the last newsletter, I looked for a resumption of the rally and, once again, the market obliged! After a final dip to 1203 last Monday (my projection for a low on the SPX was 1200-1205), the index took off and closed the week at the high of the move, rallying 62 points!
My Point & Figure analysis had indicated an initial pause at 1251, but when it became obvious that the index wanted to go higher, 1263-1265 came into play. Since the SPX closed at 1265 on Friday, we have to assume that the move is probably done, although the momentum may cause it to spill over into some weak count up to 1270. This will be determined when the market resumes trading.
What normally follows the realization of a projection, is a wave of profit-taking which causes temporary supply and a pullback in prices. I expect a near-term peak to be reached, perhaps as early as Tuesday. Correction from that level should be short-lived, but could last a few days. If I tried to forecast a retracement level at this time, I would be guessing. I will not be able to give a correct estimate until the move has been completed.
Of all the indices, the DJIA has had the strongest rally. It overcome its October 28 close by thirty points and its December close by nearly a hundred points. This may encourage some additional buying after the holiday. If so, the SPX would follow suit and rise above its December intra-day high of 1267. This is why we need to wait until Tuesday to put a price on the rally top.
Last week’s market action is bullish in itself, but possibly even more bullish is that, by overcoming its October and December tops, the DJIA is giving some credibility to the potential inverse Head & Shoulders pattern which formed over that time frame. (We’ll analyze this and other technical factors next, in the Daily Chart of the DJIA.) My projection for the entire rally from 1075 is at least 1293. If this turns out to be the top of minor wave 2, as is expected by many EW analysts, it should be followed by a serious decline. If it is not, the appraisal of the longer-term structure will have to be revised.
Last week, the headline was: “A LITTLE MORE CONSOLIDATION?”, which turned out to be correct with the SPX losing another 45 points before finding support.
What now? Last week’s prediction was predicated on cycles bottoming early next week. These cycles exerted steady pressure during the beginning of the week, but by Thursday, the SPX was starting to resist the downtrend, and this was the case on Friday as well. One reason for this action was the fact that the P&F chart had given a phase count to 1212. On Thursday, the SPX found support just below the projection target at 1210, re-tested it, and held above that level for the rest of the week.
Although this may suggest that a correction low has been made, what is more likely is that the total distribution phase count to about 1205 will be met, with the possibility of a further decline to 1195. Since cycles are due to bottom early next week, this makes more sense than forming a base above 1210.
Should this take place, the market would then be in a position to extend the wave “C” rally which started at 1159. It may have only a limited time window to do so. According to Raymond Merriman, the renown financial astrologer, astrological signs will become unfavorable to the stock market by the end of the month. Since the SPX will have to travel 90 to 100 points just to get to the former 1292 high, if he is right, it will be a challenge to do so in such a short amount of time.
On the other hand, astrology aside, the technical picture of the SPX looks favorable. As you will see on the chart, the index may be in the process of making a significant inverted Head & Shoulders pattern which would be confirmed if it can rise above 1267. Next week, if the base pattern is complete and the SPX has reversed, we can gauge by the size of the base how far the rally can travel. Previous projections have suggested about 1314, and even higher. That will be confirmed (or not) by the base pattern which is currently under construction. At this point, it looks as if the SPX will have to hold off reversing until about the middle of next week so that the accumulation pattern can be extended enough to confirm the former projections.
Last week’s headline was : “WAVE C DUE FOR A PAUSE”. The SPX obliged by surrendering 36 points into Friday morning, after which it rallied for the rest of the day and closed near its high. So! Are we ready to push ahead with Wave C?
Perhaps not right away. Although Friday’s action was bullish, and the index closed near its high of the day, it’s possible that the consolidation is not quite over. At best, this would be wave 1 of the new uptrend, with a wave 2 pull-back before the SPX is ready to surpass its 1267 high. At worst — and cycles seem to argue for this scenario — the consolidation could extend for another week or so before the index is ready to challenge its short-term high.
Over the intermediate term, it remains likely that we are in a wave “C” rally from 1075, and that we have completed its first phase at 1267. But if my instincts are right, Friday’s rally may only be the mid-point of the consolidation. If so, that would mean an extension of range-bound trading, followed by the genuine resumption of the wave “C” uptrend. 1231 is a strong support level and is not likely to be broken.
It sounds as if I speak of wave “C” as if it is already etched in stone. Actually, I have learned to keep an open mind about structure and to “go with the flow”. If we have a nasty decline after completing this “wave C”, then we can be fairly certain that the bear market has resumed. If not, I’ll have to re-adjust my thinking.
The near-term trend will be decided by what happens on Monday. A P&F projection is looking for a move to 1260-1261, followed by a pull-back with 1231 likely to hold.
The rally which started at 1075 in early October had a 218-point rally to 1292 in less than four weeks before pausing. That’s a lot of strength which has a lot of former bear market advocates beginning to change their minds. After a ten-day correction which retraced less than .382 of the uptrend, it looks as if the SPX may be ready to extend its move to the low 1300’s (see pink box on the chart below).
That would be the logical target. Several trend lines which, collectively, should provide some resistance come together in that area, and they coincide with a P&F count derived from the base which was formed just above 1220.
After this target is reached, it should be followed by another correction, but that is not likely to be the end of the move. Besides the obvious strength in the index, the consolidation which started in early August and lasted into early October created an enormous accumulation base which can lead to higher prices, perhaps even new index highs.
That base has also proven to be an area of strong support. The pull-back from 1292 could not even penetrate the higher layer of the congestion level, and the consolidation formed at its very top. On the Point & Figure chart, that accumulation base is clearly far more substantial than the distribution pattern that was formed at the 1371 top – although it does not look like it on the bar chart. One of the P&F tenets is that when an accumulation base is bigger than the preceding distribution top, the next move should carry to a new high. We’ll see if this holds up in this case. In the meantime, as long as we don’t see some real weakness coming into the market, it is probably best not to be too bearish.
The market appears to have survived a steep correction and it looks as if the uptrend is still viable. This is perhaps best observed on the weekly charts. To resume its downtrend, the SPX would have had to close decisively below 1220 on a daily basis (but even that would not guarantee that we’d be on our way to making a new “bear market” low). Instead, it bounced back up and started a near-term uptrend which retraced .618% of the decline. It opened down on Friday, but could not follow through with the morning weakness, and closed on the high of the day. This is good technical action which suggests that there is more to come on the upside before the rally (which started at 1075) has reached its zenith.
Prices have been volatilely connected to the Eurozone situation. Now that the plans for a referendum have been cancelled, and the Greek prime minister has squeaked by on a vote of confidence and intends to resign, temporary stability has returned which may allow the SPX to reach its final rally target of 1310-1320.
In fact, the weekly charts suggest that the indices are just breaking out of their last intermediate downtrend, and they may have some distance to go before the new uptrend is complete. We’ll start by looking at a weekly chart.
The title of this newsletter advises caution. There are several reasons for this. The SPX Point & Figure chart has several projections (taken from different levels) which target a top between 1310 and 1320. That, by itself, should be reason for caution. Especially when some indices which run counter to the market and have been in a corrective phase, such as TLT and the VIX appear to be very close to fulfilling their downside P&F potential.
Structural analysis also suggests that we are approaching a top. There is a strong probability that the rally from the early October low has progressed as an a-b-c structure. Although the “b” wave is hardly noticeable on a daily chart of the SPX, it is clearer on the hourly chart, especially on that of the Global Dow and other indices. If this is correct, the entire pattern from the low is evolving in the form of a zig-zag. On Friday, it looked as if we may have completed wave 3 of the second five-wave pattern. That only leaves two short waves (4 and 5) to finish the move before we have a serious retracement. Some EW analysts see this pattern as minor wave 2 of a bear market rally, with wave 3 starting as early as next week.
That seems to fit in with what some serious cycle analysts such as Erik Hadik are saying. And there is also a warning from Raymond Merriman, the well-known financial astrologer, that the Jupiterian influence which he believes was the reason behind the rally should soon begin to wane. It does not hurt to have some reputed analysts who specialize in other market methodologies support your point of view! Hence the warning: CAUTION, if you are a bull!
In today’s market climate, moves are very fast and do not stop until they have exhausted their potential projections. This is probably why the B wave retracement was so insignificant. We should therefore guard against “expecting” a sideways pattern, or a mild retracement, just because we’ve had all the strength, especially if the EW analysts are correct in anticipating the imminent end to minor wave 2. If we are about to start minor wave 3, you can’t look for a shallow, partial retracement of wave 2. The odds rather favor a potential retracement of the entire rally – as incredible as this may seem at this time.