Strategesis

From Safehaven.com:

A decline started slowly from 1370 in the SPX, and accelerated sharply after a bearish Head & Shoulders pattern had been formed. Its downward target has already been fulfilled. The intensity of the decline and, especially, the amount of distribution which took place between 5/02 and 7/22, have all the markings of a beginning bear market, but this will remain unconfirmed until we break below 1011.

The best way to support a point of view is to see if you can find arguments against it. If you can’t, it is confirmed. If, however, you can, you have to re-examine your premise. I have already alluded to the fact that there are some technical and sentiment conditions which are not characteristic of a bear market. Now, something else is taking place that could eventually add to the ambiguity. Since the 1101 low, the SPX has created a sizeable Point & Figure formation which is fast approaching the dimension of the one created at the top. Should it be resolved on the upside (pure speculation at this time), it could, at a minimum, create a double-top before the bear market resumes.

Continued

From Safehaven.com:

Fear is the greatest buy signal ever seen in the stock markets. This overpowering emotion flares fast, driving excessive selling that rapidly hammers stock prices down to irrational oversold levels. These fear-driven lows are the ideal time for investors and speculators to buy low, necessary before selling high later. Provocatively stock fear has an effective ceiling, absolute levels that demand aggressive buying.

Continued

From Safehaven.com:

ContinuedBetween 2/13/11 and 7/17/11, the SPX described a well-publicized Head & Shoulders pattern which carried a minimum downward projection of about 1165. That warned of a significant decline, but came far short of stating the full decline potential of that topping pattern. Using a standard count methodology for P&F charts, and taking it across the entire formation from right to left shoulder, we come up with a conservative projection down to about 789. A more liberal one would take the index down to 708. Whether or not these projections will be realized in full, or if the bear market concludes at some higher level, they warn us that a severe decline lies ahead and they are in full agreement with the cyclic configuration.

That’s the long-term prognosis, and it should take about three years to become a reality. But what about the short to intermediate term? That looks far more rosy. Again, based on a P&F projection supplemented with structure analysis, it looks as if the SPX is about to conclude its intermediate decline somewhere between 1086 and 1096. Perhaps as early as Monday, in conjunction with a 13-wk cycle low. What happens after that is a little murky because although the structure calls for a potential retracement of 50% of the decline to 1233, there are bottoming cycles that might get in the way of an immediate recovery. These will be discussed a little later on under “CYCLES’.

From Safehaven.com:

During the first four days of last week, stock markets around the world underwent one of their most chaotic and volatile periods in history, but on Friday, an eerie calm prevailed as trading appeared to return to normal. Has the schizophrenic market behavior really normalized, or are we simply in the eye of the hurricane? This is what we are going to try and determine in this letter.

It appears that the bull run is over and that a bear market has started but, technically this won’t be confirmed until the SPX drops below 1010.91 and makes a lower intermediate term low. It can take its time doing this — and probably will.

Arguing that we are in a bear market is enhanced by a six-month period of distribution between the 1347 and the 1370 tops which, on the Point & Figure chart, yields a downside projection of 879, and even lower (789) if we include the left shoulder of the H&S formation.

Continued

From Safehaven.com:

Continued

From Safehaven.com:

The market indicators are a mixture of positive and negative signals. They probably exemplify a market which is in an incomplete corrective mode. The faction which eventually gains dominance will determine the direction in which the market emerges from this correction.

Near-term, a favorable resolution of the political crisis in Washington will probably favor the bulls, but that may not mark the end of the correction.

Patience! This too will pass!

Continued

From Safehaven.com:

The rally which started last Monday at 1296 was not able to generate enough momentum in the weekly and daily indicators to confirm that an important uptrend had started. I had voiced my concern about the weekly indicators before, and in the last newsletter, in reviewing the weekly chart, I stated that “Neither the MSO nor the MACD has given a confirmed buy to the uptrend which started at 1265.”

By the end of the week, the daily indicators – especially the breadth indicators – were giving a non-confirmation of the uptrend with some very visible negative divergence appearing in all time frames.

My Thursday Market Summary stated the following:

“With the kind of weakness which is beginning to show in the weekly and daily indicators, there is no guarantee that the various projections will be reached, and we should be very cautious when a projection is reached and we start reversing in earnest, especially after we break trend lines (any trend line).”

The base pattern that was created on the Point & Figure chart around the 1296 low gave a potential count to 1402, which was divided in various phase projections. The phase projection that the SPX was trying to attain on Thursday and Friday was about 1353. After reaching 1347, it could go no further and started to trade sideways. By the end of the day, on Friday, it started to trade outside its trend line. Strength in the QQQ, which made a new bull market high on Friday, suggested that the SPX might follow, since QQQ has a strong tendency to lead. It did not!

In the afternoon, the announcement that the budget talks had come to an impasse is not likely to be received very well by the financial markets, and the second phase of the rally from 1265 which started at 1296 has undoubtedly come to an end. This could be averted if some renewed hope for a deal emerges over the week-end, but since the indicators are calling for a correction, what happens may only be a matter of degree.

Where does that leave us? One of my assessments was that we had been in an intermediate correction since the February high which was taking the form of a diagonal triangle. I thought that it had ended with the 1296 low. It is now likely that it has not and my current diagnosis is that the index is now in the process of completing the triangle pattern. I have reasons to believe that the bull market has not yet come to an end.

Chart Analysis

Continued

Figure and Then Point Your Way to Major Profits by readtheticker at Safehaven.com:

Why use Point and Figure Charts?

Your stock went up $1.00 on Monday and continued down $.63 on Tuesday. It went back up $1.40 on Wednesday while falling down $.30 on Thursday. When you take a look at the intraday charts you see something frustrating and erratic. No price at which to sell is clear. If only there were a method to eliminate some of the noise perhaps the stock trend would be somewhat clearer. For this, many turn to point and figure charting, because it aids in reducing noise and elucidating market tendencies. Point and figure charting displays the interplay between these two fundamental forces of the marketplace, while at the same time not tracking relatively insignificant changes.

Continued

From Safehaven.com:

Last week, the stock market got into the spirit of Independence Day early, and created its own fireworks! In my last article, I concluded that the bulls could not declare victory just yet, and it must have struck a nerve because, starting on Monday, they decided to show me! The SPX was up strongly every single day, closing on its high at the end of Friday with a 71-point ramp for the week.

That may be just about all you get for now! Instead of following through next week, the odds are that equity indices will have to do a little consolidating before moving higher. We’ll find out as early as Tuesday. After that, another limited move up before a deeper correction into the middle of the month, and the 9-mo cycle low. My thinking was that the SPX was making a correction in the form of a triangle. After last week, I am not so sure, but it could still happen. We’ll have to see what the entire pattern looks like after mid-July.

There are some other factors which support my view: the weekly chart has not yet made a confirmed break out, and both the chart pattern and the indicators need to pull back before they can extend their moves.

The UUP (dollar ETF) may be making a triangle consolidation pattern before going to a new low. It looks like it’s ready to embark on the “e” wave, which would temporarily send the market in the opposite direction.

The VIX looks like it’s ready for a short-term rally; and then there is the MSCI, which responded to the market rally with a big yawn. That index has a pretty fair history of accurately calling the market moves ahead of time. There are more indications, but this is enough to show that I have some good reasons to think that, whatever pattern is made in the end, we may have to wait out the first half of July before resuming the rally.

Let’s look at some charts!

Continued

From Safehaven.com:

Even though the SPX closed 3 points lower than the previous week, it was the first time since the correction started at 1370 that the SPX and other equity indices did not make weekly lows, and this could be significant. Even the XLF, the weakest of them all, held its ground! However, it will take another week or two to determine if SPX can hold above a low of 1258 and start reversing its downtrend.

As we will see, the odds that it will are fairly decent. The stock market has a history of correcting into late June or early July. In the past two weeks, a nest of cycles – including Martin Armstrong’s 8.6-yr economic cycle — made lows, and the next cycle which could affect the market is not due until the middle of July. This should give the market an opportunity to start an uptrend so that it doesn’t get shoved down to a new low by the bottoming 9-mo cycle.

Our “White Knight” (the SentimenTrader) is still giving strongly positive readings. Inaddition,two other indicators that were giving us concern, the Summation Index and the “Black Knight” (NDX:SPX), appear to have bottomed and have started to turn up. Also, the SPX and QQQ may both have started a pattern of higher highs and higher lows. If they prevail and starts to gain some upside momentum, it would be a strong signal that a reversal is taking place.

Continued