Strategesis

From Safehaven.com:

The pause in the uptrend was much briefer than I had expected and it is possible that we’ve already completed the A-B portion of the anticipated A-B-C bear market rally.

By overcoming the previous early September high of 1330 (not just once but twice) with a higher close this week, we can assume that the intermediate trend of the SPX is still healthy. The index has also poked its head above its 200-DMA and closed about 5 points above on Friday. There is no sign that we have slowed our upside momentum. In fact we may be starting to accelerate upward once again, though it is just a little too soon to tell.

Another sign of market health is the much improved performance of the weekly breadth indicator.

It had a little difficulty getting off the ground, but is now coming on strong. However, a warning that we could soon get a near-term pull-back comes from my daily A/D indicator which is showing some negative divergence.

The QQQ, which had been relatively stronger than the SPX throughout the whole correction from the 1371 level has started to lag since Apple’s earnings have come out but, It probably does not mean anything just now.

The leading indicator is lagging on a weekly basis, but is keeping up with the SPX on a daily and hourly basis suggesting that a serious reversal is not yet in sight. This is also reflected in the weekly chart indicators, as we will see later on.

Another index worth noting is the Global Dow (GDOW). At the top, you can hardly tell the difference between the chart patterns made by that index and the SPX, but if you look closely, you will see that it had some relative deceleration starting with the May 2010 high. Its relative weakness becomes far more flagrant when you compare the October lows. While the SPX remained well above its July 2010 low, (and is consequently still in a longer-term higher/high, higher/low pattern), the GDOW broke below its July 2010 low, and is thus no longer in a long-term uptrend. This would tend to substantiate the fact that — the current market strength not withstanding — we have started a bear market decline.

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From Safehaven.com:

We’ve got ourselves a rocket-propelled uptrend! In nine daily trading sessions, the SPX has tacked on 149 points, or almost a 14% gain. You’d think that we had started a new bull market but, considering the major cycle lows that lie ahead, that’s highly unlikely, and we are probably only experiencing a very strong rally in a bear market. As anyone who has followed the stock market for a while knows, bear market rallies are supposed to be fast and furious by nature, and this one is taking place in an extremely volatile period, so perhaps we should not be so surprised at its velocity.

In spite of this, we can still make sense of where we are and what is likely to come next. The structure appears to consist of five waves from the 1075 low, with the index now completing its fifth wave. If this is correct, the entire move would be wave A of the upward correction, and we should be on the verge of starting wave B.

The Point & Figure charts seems to support this analysis. The base pattern — including a small extension — gave us a projection to 1171. This is where the rally paused after completing wave 1. Wave 2 formed a re-accumulation pattern which provided a count to 1221, with a possible extension to 1230-1233. Wave 3 stopped at 1220, giving way to a wave 4 correction. When that pattern was completed, we had another projection to 1223 with a possible extension to 1230-1233 (which matched the count across wave 2). Incidentally, there is also a potential base extension count to 1224 which is well defined and which could turn out to be important.

On Friday, the index closed on its high of the day at 1224, intimating that it may not be quite ready to pull back before attempting to meet a final target of 1230-1233. This could happen on Monday morning, and if it does, we should be ready for the beginning of the most serious retracement since the beginning of the move. If the market decides not to go beyond 1224, it will not invalidate the structure or the projection. However, if we go substantially beyond 1233, some adjustment to the analysis will have to be made.

Besides completing the structure and reaching the target, there are several other coincident technical aspects that argue for an important pause in the rally at this time.

– On its way down to 1075, the index made an extended consolidation of several weeks. The top of that consolidation was 1230.71, and any rally to that level should expect to meet with at least temporary resistance, especially since it corresponds with a short-term high in November 2010 and also matches the P&F projection!

– The move from the low of 1075 to 1231 represents a retracement of slightly over 50% of the entire decline from 1370.

– The 200-EDMA of the SPX is currently at 1234. After a move of that extent, it is not likely that the index can shoot through its 200-EDMA without some consolidation.

– As you can imagine, the daily indicators are severely overbought with the MSO at 100%, and the A/D oscillator is in an area from which it normally retraces.

– All the hourly indicators are showing negative divergence.

– The 17-week cycle is expected to make its low next week. The effect of this cycle on the stock market is not consistent, varying from a small ripple to a sizeable move. In this case, if the SPX does top on Monday, it could bring about a significant initial correction.

– Finally, on Friday, my leading indicator started to show some negative divergence to the SPX on an hourly basis. That is only the second time that it has happened from the beginning of the rally. The first was during the wave 2 consolidation.

Taken all together, these are good reasons to expect a pause in the rally.

Let’s look at charts!

Continued

From Safehaven.com:

Here is what I wrote in my last newsletter: “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 closely correlated by Fibonacci projections. With the 3-yr cycle low about a week away, we could not ask for better conditions to predict the intermediate low.”

The SPX made its low on Tuesday 10/4 at 1074.77, and has not looked back since! It closed out the week at 1155.46 after reaching a high of 1171 on Friday.

On Thursday, I sent the following update to subscribers:

From: Andre Gratian Sent: Thursday, October 06, 2011 9:07 AM Subject: Market update

(I will let the two quotes above speak for themselves about the quality of the information that is dispensed to subscribers.)

What now? It looks as if, after the SPX reached its projection on Friday, the indices are beginning to form a short-term top. As of the close there was still no sell signal but plenty of warning in the indicators, as we will see when we look at the charts.

The action of the market last week confirms the view that we have started a counter-trend rally in the bear market that started in May for the SPX, and July for the QQQ. I don’t have a specific target for the top of this move, but 1215 (a 50% retracement) and perhaps 1248 (.618 retracement) are good bets. I will try to be more precise after the Point & Figure pattern has progressed enough to warrant a projection.

Let’s look at charts!
Continued

From Safehaven.com:

The 3-yr cycle is ideally scheduled to make its low next week and it has brought unrelenting pressure on the market over the past few days. This is why rallies have failed to hold, and why selling is intensifying. We are getting closer and closer to the day of reckoning!

Here is what I wrote in my last newsletter: “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 closely correlated by Fibonacci projections. With the 3-yr cycle low about a week away, we could not ask for better conditions to predict the intermediate low.”

In our dualistic world, there are two equal and opposite sides to every event: one positive, and one negative. In Asian philosophy, this is known as the yin-yang principle. The bad news about the current market condition is that if everything happens as it “should”, the SPX will experience another 80 to 100-point plunge into next week. The good news is that afterwards, it should start another intermediate rally which is likely to last into 2012.

Do not forget, however, that what has transpired in the market since May is most likely only a rehearsal for the next market which “should” take place over the next 3 years! Right now, we are only dealing with a 3-yr cycle. In (October ?) 2014, we will witness the bottoming of the 120-year cycle, a phenomenon that no living human has ever experienced. At this time, it is too early to predict exactly when this grand finale will start, and logic tells us that it will not be 40 times as bad as the 300-point decline from 1370 into next week’s suggested low of about 1060, but it should be bad enough. Current estimates are for the SPX to bottom between 700 and 800, but we will have plenty of time to refine this projection.

There is always the possibility that the market will fool us and that the SPX will hold above 1101. If next week fails to bring the significant weakness that is contemplated, bears be careful!

Continued

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.

Continued