Stock Market Caught in a Wide Trading Range, Odds Favor Resolution to Downside

By: Andre_Gratian

SPX: Very Long-term trend - The very-long-term cycles are in their down phases, and if they make their lows when expected (after this bull market is over), there will be another steep decline into late 2014. However, the severe correction of 2007-2009 may have curtailed the full downward pressure potential of the 40-yr and 120-yr cycles.

Intermediate trend - SPX continues to progress according to its structure. An intermediate reversal is on the way.

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.

CORRECTION CONTINUES

Market Overview

Since reaching the bottom of its initial declining phase at 1598, SPX has been trading in a volatile, wide range, not giving us a clear sense of the direction it intends to take next. The odds of a reversal upward are probably slightly less than those of continuing the correction and making new lows. The coming week should clarify the market's thinking. NASDAQ 100 and DJIA are slightly weaker than SPX, and Russell 2000 slightly stronger.

Structure: The best EW count remains the completion of wave A at 1598 and wave B still in progress. A renewal of strength with a decisive move above 1650 would cause a re-labeling of the structure. A move below 1598 would confirm the current labeling.

Cycles: Best guesstimate is that the 1-yr cycle is still pulling prices lower until sometime in July.

P&F projection: I currently have projections ready for both directions, depending on how the trend develops outside of its current broad range.

Support/resistance zones: 1598 was a very strong support level and it caused a big bounce when hit. SPX returned to test that area and again had a big bounce. Why is that? Because this is where the trend line from 1343 and the 55-DMA meet. In fact, last week they intersected at 1608, where SPX found support on its re-test of the 1598 low. This is undoubtedly the "red line" which will determine whether we continue the correction or resume the uptrend. We may be on our way to test the area one more time and, this time, if we go through, it will confirm that we are in an intermediate downtrend and heading lower.

Sentiment: Sentiment remains slightly bearish, suggesting that the overall correction may not be over.

Chart Analysis

We'll start our analysis by, once again, analyzing the daily SPX chart (courtesy of QChart). This graph could not display the current market position more clearly that it is currently doing. The move from 1343 is confined to the brown channel within the longer and wider blue channel which envelops the move from 1075. The strength of the SPX became more and more apparent as it progressed upward, finishing its move where the top of both channel lines meet, as well as that of the small pink channel which represents the final climactic phase of the run from 1343. This action alone should tell us that the likelihood that the correction is over is by no means certain. After such a protracted move, the index is entitled to a larger correction, at least a .382 retracement of its rise from 1343. That would take it back down to about 1555. There could be a larger retracement but, for now, let's use this target as the more likely scenario.

It is well known among technical analysts that the fluctuations of a stock which is dominated by professional traders are much more predictable than one whose main following is the general public. Traders give it an orderly pattern, probably because they adhere to certain technical rules which are widely followed and accepted (by traders - not by the general public). Currently, the market action is dominated by professional traders, not by the public. The action of the SPX is a good example of this. Take, for instance, the moves of the past week. Since bouncing from 1598, the price range has been dictated by the two most important MAs: 21 and 55 days (both Fibonacci numbers). This will not continue forever and, sooner or later, the index will move either above or below that range, revealing the next short-term trend.

Something else is happening which deserves notice. It appears that the index is responding more and more to the parameters of the larger (blue) channel. Trading has also taken place between two internal parallels (dashed lines) which provide support and resistance. Since they correspond closely to the MAs, this makes predicting the future direction of the index easy. Moving decisively above that trading range will mean a resumption of the uptrend and below, the continuation of the correction.

Last week, I pointed out that the daily indicators were negative and in no position to support an upward move. Not much has changed, but we may be coming to a decision point. The MACD has continued to decline from a predominantly positive condition that has existed since the beginning of the rally. It has now retraced to the zero line which often acts as support. So our attention must be fixated on that index next week. If it holds there and turns up, the odds of extending the uptrend will have improved. If it moves through, down we go! Let's see what happens.

Cycles

We could attribute last week's decline to the 7/8-wk cycle bottoming in our stated time slot. If so, it could support prices a bit longer.

The action of the yearly cycle which tends to bring about a correction in June or July, every year has been thoroughly discussed. These corrections vary in depth depending on the total cyclic configuration of that time period. We know that the major Kress cycles are due to make their lows in late 2014 and they should be exerting more and more downward pressure as they get closer and closer to their bottoming time frames. In fact, it's remarkable that the market has managed to put on such a show of strength in the face of a declining 120-yr whose low is less than two years away. I am sure that the Universe has good reasons for this to which we are not privy J.

Breadth

The McClellan Oscillator and Summation Index appear below (courtesy of StockCharts.com).

These two indicators should always be followed and compared to the market action to see whether or not they support it. Today, they are taking on an added importance because of the market condition, and they will be essential in pin-pointing the lows of the correction.

Both indices have already established that we are not in just a short-term correction. Looking the McClellan Oscillator, we can see that it has gone deeper into negative territory than at any time shown over the past year. It has exceeded the lows of the November 2012 correction which lasted two months and brought about a 141-point decline in the SPX. We may not be able to automatically assume that we are in the midst of a longer and deeper correction, but neither can we dismiss that possibility.

The NYSI is still in a steep decline, and so are its RSI and MACD. Until all three trends turn up, we can assume that we have not yet seen the end of the correction. A reversal should initially manifest itself with the McClellan Oscillator going positive.

Sentiment Indicators

The SentimenTrader (following chart courtesy of same) longer term index remains at an elevated reading, also suggesting that the correction may not be over.

Past behavior suggests that it should drop back to neutral or lower before the correction ends.

VIX

The volatility index continues to hold up well. It has slightly exceeded the former high and is trying to push on decisively to a new high. If it succeeds, it will mean that the market has decided to continue its downtrend.

XLF (Financial SPDR)

The financial index continues to mirror SPX. It too has found support on an internal parallel to the main channel and, if SPX moves lower, it looks ready to drop all the way down to the bottom line where it should find more support.

BONDS

TLT is trying to hold above the higher of the two lower channel lines. It has made a feeble attempt at re-bounding, but does not look ready to reverse the direction of its trend. At best, it may attempt to form a base, or simply continue to decline to the lower channel line.

GLD (ETF for gold)

GLD appears to have found support at the bottom of its major corrective channel. It may yet move a little lower to about 130 as the 25-wk cycle makes its low, and could have a good oversold bounce afterwards. The sentiment for gold is extremely pessimistic, which is the right condition for a rally of sorts that would correspond to the turn of its cycle.

UUP (dollar ETF)

To get a good perspective, it's probably best to look at the action of UUP on a long-term chart. It has been in a one-year holding pattern since it found support at 20.84 on 5/11. The dollar is probably marking time and forming a large base from which will emerge a significant uptrend when the Fed stops depressing interest rates and allows them to rise, but this could still be months away!

USO (United States Oil Fund)

Last week, USO popped outside of its minor downtrend line with a 30+ cent gap, but then just remained in place with no follow-through. Volume was average and, unless it can extend its gain quickly, it will probably fall back, the whole action being essentially meaningless, and not the beginning of an important uptrend.

Summary

SPX is caught in a wide trading range which appears to be a consolidation after its initial 89-point drop from the 1687 high. When the consolidation is over, the odds favor a resolution to the downside, but this will have to be confirmed.

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