Technical Analysis Of The Markets

SPX: Long-term trend - Bull Market?

Intermediate trend – SPX is in the midst of an intermediate correction (at least).

Analysis of the short-term trend is done on a daily basis with the help of hourly charts. It is an important adjunct to the analysis of daily and weekly charts which discusses longer market trends.

FIRST TIER RESISTANCE BREACHED

KEY LEVEL EXCEEDED

Market Overview

After undergoing some price deceleration as it approached the key level of 2040, (thereby suggesting that overhead resistance was having some effect) SPX was given the catalyst it needed to propel it through the obstruction that stood in its way.  On Thursday, Mario Draghi made some bullish comments about more stimulus, and this was followed by China cutting its interest rate again on Friday.  The index responded with a 60-point move to 2080. 

Now that we have overcome the lower resistance band, we should expect higher prices until such time as the typical warnings that we have come to the end of the road begin to appear.  These consist of deceleration in price, divergence in breadth and momentum indicators, as well as the refusal of some key indexes to follow the lead of the SPX.  Already, as we will see later, last week IWM and XBD increased their relative weakness to SPX by not keeping up with its rally.  But the signs are, at best, mixed right now and we will have to see if the upside momentum has enough reserve to take us to a new high.  If the August low represented the end of primary wave IV and if we are now in primary wave V, the odds of exceeding 2135 -- which is only 60+ points away -- are pretty good.  We should also be aware that when this top is in place, the end of the bear market will be far more likely and not just a false alarm.

Let’s take a look at the charts to see where we are!

Intermediate Indicators Survey

Last week, the weekly MACD recovered almost 7 points to -18.30 and is still negative, but the histogram turned positive.

At 100, weekly SRSI has now reached the top of its range and we’ll need to wait until it begins to loose upside momentum to signal a reversal.

The NYSI (courtesy of Stockharts.com) has gone positive for the first time since June and has started a good uptrend.  However, the degree of overbought conditions in both its MACD and RSI are suggesting that a top may not be far away.  Its ability to continue recovering before turning down again will give us some clues about the underlying market strength.

In P&F charting, congestion from the low to the break-out point is the most dependable.  That was filled at 2040.  We have now started on the count at the left of the low which still has more potential.  We’ll consider the validity of each phase count by observing price behavior and that of the indicators as the index works its way through each one.

Chart Analysis

Daily SPX chart (courtesy of QCharts.com, as well as others below).

This chart has several interesting features that we will address one by one.  First, the first tier of resistance was augmented by the top trend line of the red correction pattern.  Prior to breaking through it, the index had been drifting away from the top line of its minor uptrend channel and had crossed over to the lower channel line as if it were ready to break out of it.  This was obviously a decision point and, as mentioned earlier, a catalyst appeared just at the right time to help it decide for the upside.  The former resistance band (marked by dashed lines) has now become a support level.

As a result of its rally, SPX has now reached the bottom of the next tier of resistance which starts around 2075.   It is also interesting that, at the same time, the index is now back-testing the bottom channel line of its intermediate blue channel, which should provide additional resistance. It has also reached the green trend line which is drawn across the last two former tops.  This green trend line has been discussed before.  It extends at a fixed angle of ascent, and all parallels to it drawn from any former short-term low or high point in the market will act as a support or resistance line, depending on the direction from which it is approached. 

So we should be at another decision point for the index.  It has reached overhead supply, it is back-testing the busted intermediate channel, and is finding additional resistance at the green trend line.  How it reacts to this level over the next few days should clue us about its future intentions. 

The indicators are giving mixed signals!  The MACD remains in an uptrend with only the histogram showing some minor deceleration.  The SRSI has tried to correct a couple of times, but could not follow through.  The third time could be the charm and signal a correction, especially since the A/D oscillator has shown negative divergence at the last two market peaks, with the second even lower in spite of the strong rally. 

Hourly SPX Chart

The resistance at the top of Friday’s move consists of the various trend and channel lines discussed above which are more visible on this chart.  In addition, the index completed 5 waves from the 2018 level, and the effect of all this is already showing; the top apparently having been made in the next-to-last hour of trading with a move outside of the minor channel in the last hour.  This places the index in a good position to open lower on Monday morning and start correcting.  On this chart, you can see how the index was rescued just in the nick of time by Mario Draghi’s announcement; it was already starting to breach the blue channel. 

In the indicators, the MACD is still positive, but not quite as much as displayed by the daily one. 

Here, deceleration is at work and evident when comparing the last phase of the indicator to early October.  The SRSI started to make a bearish cross in the last hour of trading.  The A/D oscillator is by far the weakest, confirming the negative divergence displayed at the daily level.

The first test of the uptrend from 1872 was passed at 2040 with an “A” grade.  Let’s see how the index handles this second test.  After trading for a few more days, we’ll find out if we continue to forge ahead or develop some kinks in the rally.

XBD (American Securities Broker/Dealer) and more

It appears that last week’s market strength was reflected mostly in the SPX although, to be fair, the NASDAQ 100, SOX and DJIA also had relatively good moves.  However, some of the key indexes, the mid-cap and IWM (shown below) were the worst laggards (or is it best?) and the XBD and TRAN did not exactly shine, either. 

It is too soon pass judgment on the entire market because of these few leaders’ action.  For all we know, they may start to catch up over the next couple of weeks.  But the last phase of a bear market can be fickle and we should be looking for warnings that this bull is coming to an end.  These are some of the warning signs!

UUP (Dollar ETF)

The dollar also reacted to Mario Draghi’s comments which cause the Euro to retrace and the dollar to surge.  This time, it looks as if UUP intends to make a clean break out of its consolidation phase, but it had several starts of this nature before and failed to follow through.  Let’s see if it does this time.  If this is for real, it is now ready to complete the move which was projected when it broke out of its base (to 28/29).  What makes this credible is that the base count is now fully confirmed by the re-accumulation level which now looks complete. 

GLD (Gold Trust)

GLD may be reacting to the strength in the dollar.  If the latter has the capacity to rise to its projected high, GLD may still get a chance to reach its unfilled projection of 100!

USO (United States Oil Fund)

Besides the continued crude glut, USO will be affected by the dollar strength as well, and this could also send it to new lows.  I know that this may sound ridiculous to some, but if USO just completed a re-distribution phase above 13, it has now the potential to reach the 8 dollar price which was originally suggested by its former count. 

Summary

SPX had an original base projection to 2040 which corresponded to reaching the first tier of resistance formed by overhead supply developed during most of 2015.  Just as it was about to roll over from that level, it was rescued by comments from Euro Central Bank’s president Draghi stating his intention to continue an easy money policy, and by another cut in China’s key interest rate. This sent the index soaring some 60 points to another important level where it is meeting with another zone of stiff resistance.  

Its ability to push through this level as well should confirm the EWT analysts’ premise that we are now in primary wave V and that the index is probably on its way to besting its 2135 high. 

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