Technical Analysis Of Major 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 the course of longer market trends.

WILL IT OR WON’T IT?

Market Overview

Ever since its sharp decline to 1865, SPX has been trading in a broad range which looks as if it could be the mid-point congestion of a measured move.  A week ago, it looked as if it were ready to complete a triangle formation, but the pattern has continued to expand in what could still be a symmetrical triangle.  And, since a triangle normally forecasts a continuation of the trend which existed prior to its formation, more weakness ahead continues to be the logical forecast.  This is also supported by important cycles which should not make their lows until late September/early October. 

This week, the Fed will announce its decision about the timing of its first interest rates increase.  Analysts are split right down the middle as to whether it will be this month or later.  If the market should react positively to this decision, the upside should be limited by overhead supply which begins roughly around 1980 and gets much heavier as the index reaches the mid-2000s.

Indicators Survey

At the October low, the weekly MACD was roughly +20.  Last week it closed at -24 and was still dropping.  Considering the fact that SPX is still trading significantly above its October price, I interpret this as extreme negative divergence.

The McClellan Summation Index has matched its October low almost exactly.  That, too, has to be interpreted as negative divergence to the index, but the RSI and MACD of the NYSI are showing some positive divergence.  Technically, this could suggest that the NYSI is in the process of forming a low. 

The overhead supply above 2040 has resulted in a P&F count which portends far more weakness ahead, but the initial decline has stalled after the first phase count was reached.  It is remotely possible that SPX will be content to limit its downtrend to this first phase after completing a theoretical primary wave IV of the bull market. 

Chart Analysis

On the following chart of the Daily SPX (courtesy of QCharts.com, as well as others below), I have marked the potential triangle formation with solid red lines.  The trend line which is broken will determine the consequent near-term trend. 

While SPX has yet to come out of the triangle, it has already broken out of its steepest (black) channel.  I do not believe that this yet constitutes a change of trend.  The blue channel is more likely to demarcate the real short-term downtrend since the bottom line starts just under the high of the move and connects with the 1865 low.  For a true change of trend, the index would have to break above the top blue channel line and, even after that, it would still have to overcome the red trend line which connects the two declining tops.

Since the Fed decision next Thursday has the possibility of being a powerful catalyst which could push prices in either direction, I would rather wait to see the market’s reaction and pick-up the analysis after that.  I would note that the indicators are mixed, reflecting the indecisive price structure.  SRSI has reached the top of its range which should soon make it vulnerable to a pull-back, but the MACD, which had remained flat and oversold has just made a bullish cross, potentially reflecting the start of a near-term uptrend. 

The Hourly chart depicts very clearly the state of indecision in which the market finds itself.  The action has steadily decreased in amplitude as prices progressed toward an apex, except that on this chart, the pattern has begun to take the appearance of an ascending triangle rather than a symmetrical one.  Another thing to consider is that for a triangle to be valid, prices must break out before they go past two thirds of the length of the consolidation.  It looks as if we are beginning to exceed that limitation and this could invalidate the triangle formation entirely. 

The indicators are leaning toward bullish over the near-term, with the SRSI having given a buy signal and the A/D seemingly ready to turn up.  Of course, this is an hourly chart and even a genuine buy signal could be quickly exhausted after placing the indicators in a position to produce a sell signal. 

The overall pattern reflects a market which is waiting for a reason to move in one direction or the other.  The Fed decision on interest rates due this week should give it that incentive. 

XBD (Amex Securities Broker/Dealer)

XBD, one of the most respected market leaders, is also in a triangle consolidation which appears to be a little clearer than that of SPX.  In this case, the pattern has completed the “d” wave and may have started on the “e” and final phase of the formation.  If that’s the case, one more little push upward over the next couple of days would place XBD (and the market) in a perfect position to sell off on Thursday’s Fed announcement. 

UUP (dollar ETF)

UUP continues to consolidate after seemingly completing its consolidation at about 24.25.  The strength of the re-bound suggests that there was plenty of support at that level and that the index might be ready to resume its longer term uptrend.  But so far, it’s only a suggestion, and a continued move above the top trend line will be needed to make it a reality. 

GLD (Gold trust)

There is a clear P&F projection to about 100, and GLD’s 25/26-wk cycle is expected to make its low in early October.  This makes it the ideal time/price combination for the index to put a potential end to its corrective pattern from the 186 high.  If, as discussed in the last letter, it represents a consolidation in a long term trend, we should be prepared for an important move to start after that time frame. 

USO (US Oil Fund)

USO completed its projection to 13 right on the lower channel line and had a quick re-bound before moving sideways.  It is unclear if it will re-test its low and build a base, or extend its initial rally right away.  Either way, its current action does not give us much of a peep-hole into its future trend.  More time is needed.

Summary

Since its sharp decline to 1865, SPX has worked its way into a consolidation which has the appearance of a triangle.  If it is in fact a symmetrical triangle, the odds favor a continuation of the selling after pattern completion.  This could come as early as Thursday when the Fed announces its decision on interest rates, but since the index could also stage a surprise move in the opposite direction, it is best to wait past that critical period before hazarding a short-term forecast.

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The above comments and those made in the daily updates and the Market Summary about the financial markets are based purely on what I consider to be sound technical analysis principles. They represent my own opinion and are not meant to be construed as trading or investment advice, but are offered as an analytical point of view which might be of interest to those who follow stock market cycles and technical analysis.