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.

Continued

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.

Continued