Strategesis

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.

Continued

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.

Continued

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