Imminent Stock Market Rally Top

By: Andre_Gratian

Current Position of the Market

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 and prolonged 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 - The uptrend from 1343 may have a little farther to go before topping.

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.

RALLY TOP IMMINENT

Market Overview

Last week, I suggested that we had reached a secondary top, but probably not the final top of the rally. Indeed, the SPX had a 25-point correction early in the week, and by Tuesday was ready for the final rally phase which should lead us into the high point by next week. This, of course, is assuming that the situation in Cyprus is resolved by Monday and that this good news provides the fuel to get the SPX up to its projected target.

From a structural standpoint, we should be in the final thrust of the rally that started at 1343. Another way of saying it is that we are in the process of completing wave 5 and, when complete, it should be followed by the largest correction since the beginning of the uptrend. Subscribers will be informed of the potential magnitude of the decline when a top has been made and a valid projection can be established.

The anticipated rally high is not likely to be the end of the bull market, only an intermediate correction in a long-term uptrend. The original base which was formed in March 2009 is potentially capable of higher projections, and the re-accumulation pattern which formed in the low 1100's confirms these higher counts and makes them more credible. Of course, we won't take these for granted but we'll let the market tell us if it is still willing to fulfill its original intention. For now, since it is letting us know that it wants to pause and recharge its batteries, let's focus our attention on this final rally phase.

Chart Analysis

We'll start our analysis by looking at a weekly chart of the SPX (courtesy of QCharts) because it illustrates the statement that I made in last week's letter, namely that the bull market shows no sign of long-term deterioration and therefore it would be premature to expect an end to the bull market at this juncture. When we see a loss of momentum taking place in the indicators (there is none currently), it will be time to look for signs of deceleration in the index itself. Then we can look for trend lines and MAs to be broken and finally, when the price comes out of the bottom channel line, we can say that we have an end to the bull market. At this point in time, we could be as much as a year away from these occurrences.

If you look at the indicators, both have made new highs since the trend which started in October of 2011, and this new high shows no sign of being an ending climax, so we should expect the trend to continue up until there is technical deterioration in both indicators and price.

The fact that the indicators have made a new high also brings up an interesting conjecture! The SRSI just pulled back from having touched its maximum reading of 100 and shows none of the negative divergence which has characterized intermediate tops in the past. If we take this at face value, it is telling us that even the move from October 2011 is probably not complete and we cannot, therefore, expect a major correction from this level. That, too, gives credibility to our expectation of an on-going bull market.

We'll now analyze a daily chart which illustrates very clearly what the indicators look like when we approach the end of an uptrend.

The analysis is pretty straight forward. Starting with 1343, SPX has moved up in 5 well-defined waves, with the 5th wave most likely incomplete. Odds favor that it will reach completion by next week in conjunction with a positive resolution to the Cyprus crisis. Of course, if events turn negative instead, we stand the chance of having seen a premature end to wave 5 at 1563.

Compare the daily indicators to those of the weekly chart. In the latter, no trace of negative divergence can be found, but in the former, it is prominent in all three indicators. Market history tells us that after 5 waves in one direction, a reversal will almost certainly take place. It's only a question of deciding when the 5th wave is finished. There are times when the 5th of the 5th is either truncated (fails to make a new high) or simply goes missing. This would most likely be the case here if there is no positive news from Cyprus on Monday. A decline in price below the red horizontal line (1539) would signal the beginning of a correction of the entire rise from 1343.

A quick look at the hourly chart will show us exactly where we are as of Friday's close (again, charts courtesy of QCharts). It's rare that the structure is so visible in EW terms. The 5th wave of the move from 1343 which is shown here, has a clear 1-2-3-4 and is now working on wave 5. You can see why it is important not to get negative news on Monday. If we did, it would most likely abort the ongoing development of 5 of 5. With good news, it could essentially replicate the pattern of the wave 4 and 5 of higher degree. It is not often that we see such a clear demonstration of the fractal nature of the EW theory. The topping pattern is a smaller replica of the H&S pattern that developed at the lower level. That does not assure its completion, but it does raise the odds that it resolve itself in a similar manner.

Cycles

Because of the long-term strength which the stock market exhibits, it is pushing farther and farther away the beginning of weakness anticipated as a result of the bottoming process of the 40-yr and 120-yr Kress cycles. The start of this retracement could be as far off as nine months to a year away and still bring about a shortened but grueling bear market similar to the one experienced in 2008. A less likely event would be the postponement of this low from October 2014 to 2016 -- less likely because this would have been unacceptable to Kress who believed in the exactitude of cycle phases.

Regarding the short-term: in the last letter I pointed out the repetition of a one-year cycle top around April since the bull market started. That is the high point of a one-year cycle whose low tends to come around every July. A continuation of that basic rhythm would fit in perfectly with the completion of our 5th wave around the end of this month. The regularity of the one-year cycle and the clarity of the wave structure could make this one of the most predictable bull markets in history.

Breadth

The McClellan Oscillator and Summation Index (courtesy of StockCharts.com) are posted below. The McClellan oscillator has stabilized over the past week, in sync with the current market position. An upward completion of the rally should get it briefly positive again. That could turn up the NYSI for as long as the NYMO remains above zero. The pattern suggests that a rally of intermediate proportion is coming to an end.

Sentiment Indicators

Last week, the long-term white circle moved down slightly to the bottom of the red zone. This may give the SPX the time it needs to complete its 5th wave from 1343.

VIX

This chart of VIX does not tell us very much, except that by still being in a downtrend, the market must still be in an uptrend. More information is derived from the Point & Figure chart which suggests that a decline down to 10 or slightly lower is still possible. If this is realized, it will be in conjunction with the market making a new high.

XLF (Financial SPDR)

In the last couple of days, XLF fell behind SPX, but only by a fraction. It will have to do better than that to suggest that we have a top in place. I am still expecting some evident relative weakness to occur at the high. Let's see what happens next week.

BONDS

TLT challenged its outer channel line twice this past week, but without success. Even if it should get out of its down-channel, it does not look as if it has built enough of a base to go very far. As far as the market is concerned, if it manages a break-out, it will most likely mean that the market has to retrace one more time and needs to alter its structure. If TLT pulls back on Monday, it's probably because the market is reaching for a new high.

GLD (ETF for gold)

GLD is trying to reach the 159-160 target projected by the base that was built around 151-152, but it has been stopped by a former high at 156. If it can't pierce through the minor resistance, it may have to pull-back and continue its consolidation. It's not clear what comes next because its indicator is very overbought, but it is possible that UUP (next chart) is ready to consolidate, and this would help GLD to reach its projection.

UUP (dollar ETF)

UUP has had a good bounce off the bottom of its long-term up-channel and it easily overcame a former short-term high. It is ready for a pause and that former high should serve as support for its consolidation. Afterwards, it should continue toward the top channel line. The base which it created before starting its uptrend has enough of a count to carry it to that level

USO (United States Oil Fund)

USO has almost completed what appears to be a triangle formation that was started in July of last year. If that is a correct evaluation, one more little move to about 34 would fill a gap of the previous downtrend and complete the "e" wave of the formation. A reversal would then take place that would start a decline towards a new low around 29.

Summary

In the last newsletter I stated that we had only reached a secondary top and that after a correction, SPX should meet its projection target, putting an end to the rally which started at 1343.

Last week's action has brought us a little closer to the fulfillment of this forecast.

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