Stock Market Tad More Distribution Needed

By: Andre_Gratian

Current Position of the Market

SPX Long-term trend: If the market strength persists, the long-term trend may need to be re-evaluated.

SPX Intermediate trend: SPX intermediate P&F count to 2300 is still possible before a reversal occurs.

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 discuss longer market trends.

A Tad More Distribution Needed

Market Overview

The SPX 2270s resistance band halted the intermediate uptrend from 1810 for three weeks, but last Friday, the former high of 2277.53 finally succumbed to a marginal new all-time high of 2282.10. This must have required a superhuman effort on the part of buyers because, instead of punching through, the index immediately pulled back and closed at 2277.18. The Dow Industrials also made a new all-time high of 19,999.63, failing to reach 20,000 by 17 cents, and closing at 19,966.68!

Friday was ostensibly the high point of a consistent 15-day cycle which could continue to depress prices early next week but, despite this appearance of exhaustion, it is likely that the market will catch its breath in a few days, and make another attempt at reaching the 2300 projection which has been on our radar screen since the low of 1810 was made, but looked as if it was going to be usurped by the lower 2700 target. Any final high -- 2300 or not -- should come in the next one to three weeks. We are in the topping area of several intermediate cycles, one of which is already exhibiting several weeks of right translation.

The warning signs mentioned earlier have not gone away! The Fear and Greed Index pulled back a little, but is on the verge of crossing into "extreme greed" again. Breadth made a strong showing in the first two trading days of the new year, but it was short-lived and, for the past two days, it was mostly negative. The benefits of seasonality may already be exhausted.

Yesterday, 3 black crows flew in front of my car. Was this an omen? (Actually, they were ravens! :-))

Analysis

Daily chart

We must admit that the break-out to a new all-time high does not look very impressive! The index was rescued from continuing to decline by portfolio buying in the first two days of the year, and the channel breach only lasted one day. But since then, prices have not been able to pull away from the lower channel line. They must do so soon, or risk trading outside of it completely which, due to the current cyclical patterns, could lead to an immediate reversal.  A confirmed sell, for the short-term at least, would come if the recent low of 2234 were penetrated, and this would evolve into an intermediate downtrend if we dropped below the dashed lines representing support.

After already rising nearly 475 points without a serious correction, we may be overdue for a "normal" .382 retracement of that distance.  This would amount to a correction of 180 points, which sounds like a lot, until we take into account that several important cycles are due to make their lows around April/May.  It took 11 months (so far) for the uptrend to unfold. A rough calculation of dividing 4 months of correction into 11 months of rally gives us a time factor of .364 which is a good match for a .382 distance ratio. (Interesting speculation, which is all it is, and proves absolutely zilch!)

The sudden reversal of strength in breadth is evident in the A/D oscillator, at the bottom of the chart. The SRSI is already losing momentum! And the MACD, whose settings should provide more volatility than the normal ones, has not even been able to effectuate a bullish cross. When it turns down again and becomes negative, it will most likely give us a confirmed sell signal.

This chart and others below, are courtesy of QCharts.com.

Hourly chart

Another wedge? That's what the break-out pattern looks like! It also ran into several trend lines when it reached 2282 and was a minor target provided by the last small accumulation phase. Combine that with a 15-day cycle high, and it's no wonder we turned down into the close -- new all-time high be damned!

In the last letter, I mentioned that we had developed some positive divergence in the oscillators which could lead to a bounce, but I had not expected to see it take us to a new high. At Friday's close, we had a reverse condition!  The MACD and A/Ds are very bearish, and although the SRSI made it all the way to the top of its range, it's reversal has already created a bearish cross.  If I did not have potential higher counts to 2300, I would call a top right here and now. Instead, I will give SPX the benefit of the doubt and another chance to go for the higher target.

An overview of some major indexes (Weekly charts)

The 4th week of consolidation has created a little more congestion at the top of the strong up-thrust which took place after the November elections.  The leadership appears to be shifting. QQQ (top right), instead of leading us to the downside, is playing catch-up while IWM (top center) and TRAN (bottom left) are taking over as the new potential doomsayers. Of course, both (especially TRAN) were the acknowledged prophets of the last major correction from January 2015 to January 2016, so I may have been betting on the wrong pony to take the lead this time. It will be worth keeping an eye on those two!

UUP (dollar ETF)

UUP could not quite reach its 27 target but came close, printing 26.83 in a final thrust before backing off immediately. This is a sign that it is probably done for now and should extend its correction for the next few weeks, although it may enter a period of distribution around this level, first.

GDX (Gold Miners ETF)

GDX sensed that the dollar was due for a correction and was quick to capitalize on it. It met its 18.50-19.00 projection, found ultimate support at 18.58 on December 20 and, last week, rose to 23.09 before beginning to consolidate.  Cycles may take it to a marginal new high (or at least a retest of the high) before the correction starts in earnest. The pull-back could then take the form of a base expansion, which is needed if it wants to challenge the recent high of 31.80. If the current base remains as is, it will be limited to a move up to 29.00.

Note: GDX is now updated for subscribers several times throughout the day (along with SPX) on Marketurningpoints.com.

USO (U.S. Oil Fund)

USO has met with resistance at the top of its channel once again. However, it may be creating a re-accumulation pattern above 11 before breaking through overhead resistance.

Summary:

Last week's call for the beginning of the intermediate correction turned out to be premature. Since then, the SPX has reluctantly made a new all-time high, but the DOW amusingly continues to refuse printing 20,000. A minor correction may take place next week before SPX has a go at the 2300 target, and the DOW finally allows the bated breathing bulls to resume their normal respiration pattern.

Andre

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