Strategesis

From Safehaven.com:

In my newsletter of September 11, I mentioned that the market was just about ready to fall off a cliff. I am not sure if this was the proper analogy but, after a 10-day reprieve, and using the Fed report of September 11 as an excuse, prices broke sharply with some indices already trading at new intermediate lows. I believe that the real reason behind this move is the bottoming phase of the 3-yr cycle and, since its low is not due until the first week in October, we are not likely to see the completion of the current intermediate decline before that date.

The SPX made a double-top at 1220 that created a pattern on the Point & figure chart from which we can estimate the extent of the decline by taking a count across the 1195 line. We come up with two well-defined targets: One to 1080, and the other to 1040. These are in close correlation with Fibonacci projections. With the 3-yr cycle low about a week away, we could not ask for better conditions to predict the intermediate low, both in price and time.

The SPX, along with a few other indices, has not yet broken below the August low, but it’s surely only a matter of time before it does. Some averages usually lead the rest and they can be helpful in forecasting reversals. The Russell 2000 has that reputation and, in retrospect, it did give a small warning when the SPX made a double-top at 1220 and it did not. On Thursday, it broke its low of 8/09 by a small margin while the SPX remained well above. This is probably another indication that new lows are ahead, especially with about another week to go into the cycle low. In any case, I started searching for a leading index that has better predictability than the Russell, and I believe that I have found one that exceeds it, not only in predictability, but excels in consistency as well. Its current technical condition definitely suggests that new lows are still ahead.

At Friday’s close, this lead indicator was essentially near-term neutral, probably because the market will be moved by what comes out of the G-20 meeting this week-end. I am still trying to find the best way to analyze it and on what time frame. For instance, is the warning of a reversal clearer on a daily chart, an hourly chart, or even on a 5-m chart? And is it better evaluated strictly on a divergence basis, or by using Fibonacci projections and retracements? After I have had a chance to evaluate this further, I am sure that I will have gained another very powerful forecasting tool.

Last week, I showed a chart of the Dow Jones Composite. After one more week of trading, it looks essentially the same and has remained above its August 9 low. If the SPX should correct to 1040, the current price ratio between the two indices would put the Composite at about 3400, well above its July 2010 low, and still well within the confines of its up channel. In other words, still in an uptrend, technically, but with the very long cycles bearing down into 2014, it’s probably only a matter of time before a confirmed reversal occurs.

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From Safehaven.com:

After making a new high at 1370, the SPX lost its upward momentum and subsequently broke the important 1260 support level. This caused many market analysts to assume that the stock market had started a new bear market decline. I had pointed out previously that, in order to confirm a bear market trend, the index would have to trade below its July 2010 low of 1011. It does not look as if this is going to happen anytime soon. Now, my question is becoming: can the SPX even trade below its August 2011 low of 1101 by the time that the 3-yr cycle makes its low in early October?

A little over two weeks ago, a decline started from 1230 which looked as if it would continue until October and make a new low in the process. With the positive action of the past week, this scenario has come under serious scrutiny. Although a decline should eventually materialize into (about) the second week in October, It is no longer clear that the bottoming cycle will create enough weakness to challenge the 1101 level. In fact, the market is showing enough technical strength to suggest that, after a near-term correction, it might even make a new high before succumbing to the 3-yr cycle downward pressure. I will show you why when we analyze the SPX daily chart.

By Friday’s close, the hourly momentum indicators were overbought and the A/D was showing negative divergence in both indices. However, neither index had given a short-term sell signal. The Point & Figure chart looked as if it might be making a distribution top, but this will only be confirmed if prices drop below 1205. If we have a good opening on Monday, SPX could even run up to 1222 – 1228 before beginning a short-term correction.

With these parameters established, let’s start to look at some charts.

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The purpose of technical analysis of market price charts is to a) filter out the cyclical up/down tactical changes in momentum so as to reveal the underlying strategic trend, b) to de-trend the price graph so that only the tactical cyclical changes in momentum remain, and c) to use volume and/or open interest to measure the level of commitment to a price move.

Trading strategies based on technical analysis require taking less risk on trades against the trend (perhaps none at all,) and entering trades when the tactical momentum shifts direction from extreme levels.

That’s it. It’s that simple. The only differences are the mathematical tools used to smooth out tactical cycles of momentum and to de-trend the price data in order to emphasize them.

From Safehaven.com:

Last week, the SPX squandered an opportunity to extend its uptrend. Although it has not yet violated its series of higher lows since 1101 on 8/09, and has a good chance of starting next week with positive action, the odds are stacked in favor of the resumption of its long-term downtrend.

With the 3-yr cycle scheduled to make its low in early October, equity indices are facing an adverse cyclical configuration and, among other negatives, last week the dollar appears to have broken out of an intermediate downtrend. Also, TLT and the VIX are in solid long-term uptrends which may be ready to be extended.

The structure is playing out as a likely wave V for the downtrend which started at 1370. There was a question as to whether wave V had made a truncated low at 1121 but, with the recent market action, it makes more sense to place wave IV at the SPX 1230 high on 8/31, with wave V currently underway. There will be a good rally after the completion of wave V, but not before the index has made a new low — perhaps in the vicinity of 1065 (preliminary target).

On Friday, SPX probably ended its decline from 1204 and is now ready to start a near-term bounce or, it could end on Monday instead. Either way, as we will see on the hourly chart, the short-term indicators appear ready to reverse. Should the bounce develop exceptional strength, the structural analysis would probably have to be revised.

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From Safehaven.com:

The second rally phase of the equity indices ended on Wednesday 8/31at 1231 on the SPX. Or is it the first? It depends on what kind of an analyst you talk to. Some EW experts believe that the decline back down to 1121 was a wave V failure from 1371, and that is when we started a corrective wave up. If it was not, and if we just ended a corrective wave IV, we are heading for a new low. We’ll find out which is right over the next few weeks. What is certain is that the depth of Friday’s retracement has nullified the possibility of the rally developing into an impulse wave for SPX.

In the last newsletter, I discussed the cycle configuration that lies ahead which will most likely determine the course of the market (until early October when the 3-yr cycle is scheduled to make its low). In spite of the current weakness, the trend may soon turn up, perhaps until 9/12 when the 14-15-wk cycle will make its high (assuming that it has not already done so). It will be between that date and early October that the market will be the most vulnerable to make a new low.

My crystal ball for early next week is prophesizing more weakness into about 1165-1158, and then the beginning of another near-term uptrend which could last until that cycle top on the 12th. That date is also interesting from an astrological view point. According to Raymond Merriman, the renowned Financial Astrologer, the second half of September has astrological signatures which could be adverse to the stock market. After early October, we should have a better idea of what kind of market trend we are in. In spite of the recent rally my long-term trend lead indicators have only consolidated and are still bearish. This, and the fact that the intermediate downtrend channel is still intact continue to give the long-term market trend a negative rating.

Let’s illustrate the current market position with charts.

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