Jun 23, 2012

Weekly review

Short term view - probably positive start of the week but at the end I expect another red week.
Intermediate term view - intermediate term bottom reached higher prices in the next months.

The forecast from last week played out very nicely:) The market chose to break through the upper boundary of the wedge and touched resistance... almost touched it SP500 hit ~1363,5 and resistance is at ~1365 but who cares:). I have said also if we see a breakout it will be short living and a fake one. The market waited for FOMC and plunged on Thursday. For now is everything on track.

What to expect? - Move lower has began. I think both options - higher low or lower low are alive. Depending on the way the correction is moving lower and its speed will tell us which option has higher probability. If the prices are moving lower fast and fall back in the channel(chart 2 daily) lower low has higher probability. If the prices start moving slowly and crawling on the outside boundary of the channel(chart 2 daily) higher low has higher probability.
I would prefer to see lower low. In this case everything will look better - the technical picture with divergences, the market breadth indicators with second low, the cycles, Tom Demark's sequential... but the market does not care what I wish and what is perfect or not.

Short term - I think the week will start positive and we will see the histogram turning positive before the next sell off. The two scenarios are shown on the chart bellow (if SP500 opens below 1330 on Monday than forget it:).
Huge bars ignite selling at the begging of a move or mark exhaustion and capitulation at the end of a move. The one from Friday June 1-st appeared at the end of a move and on the next day a have said this is capitulation and the move will be over soon. Now we have huge bar at the beginning of a move which means a sell of has began. In the Next days sellers should show strength and prices should not retrace more than the half of this bar which is ~1341 and resistance at ~1344. This levels should not be broken and if the SP500 touches them should reverse right away. If this does not happen the sellers are not strong enough.
On Friday SP500 spent whole day above 1330 and closed above this level which raises red flag. That left the door open for a move higher above resistance ~1344 and probably test of the broken wedge.
Again the way the prices are moving will tell us how deep this sell off will be. Intermediate term - expect sell off for 2-3 weeks. The two options are shown bellow.I have explained them above.
The Histogram turned lower, the MCAD touched the zero line and it's turning down too, so I expect move lower for 2-3 weeks to reset the histogram. In both cases the indicators will make higher trough and mark divergence or confirmation in the case of a higher low.
The big picture - here we have the opposite case compared to the daily chart. The Histogram turned up, the MACD touched the zero line and it's turning up. The Daily chart is pointing down and the weekly up. Is this confusing? Not at all. We have to put the puzzle together. The weekly chart is more important so the interpretation is - we will see weakness for 2-3 weeks (that is what the daily chart says) but after that the direction is up for 2-3 months (that is what the weekly chart says). We had the same situation last week - hourly chart was pointing up and the daily down, that is why I said move higher but short living.
Anyway I wanted to show this chart because of something else.... see the dates, the month of July to be more precise. July is obviously important month. For the last six years it marked important top or bottom(two tops and four bottoms). So with expected move lower into early July I think we will see an intermediate term bottom and move higher for the next several months at least, which is November - the presidential elections in the USA:)
A perfect move from technical point of view is shown bellow:) - sell off touching support and the trend line and then move higher into November testing the trendline.

Still positive. One day sell off is too short period to expect them to change the direction. I expect to see a second trough on indicators like McClellan Summation Index and Bullish Percentage when this move is over, which usually mark an intermediate term bottoms.
McClellan Oscillator - hit extreme 82.74 and this red bar is not a surprise. Still positive but soon we will see it bellow the zero line.
McClellan Summation Index - still pointing up
Weekly Stochastic of the Summation Index - pointing up, one more reason why this move will not last very long, how deep is another question.
Bullish Percentage - turned down, but still shows buy signal. Its just too early. Waiting for a second trough.
Percent of Stocks above MA50 - at 44.40 there is now important signal, waiting for second trough.
Fear Indicator VXO - at 17,90 waiting for a divergence or move to 28 to mark the end for the move.
Put to Call Ratio - waiting for a second high with divergence.

CYCLES (TD - trading days)
The small cycle turned lower promptly. The last one was shorter so probably this one will be longer 24-25 days which means another 2 weeks of weakness. The low for this small cycle will mark the low of the 20 and the 40 week cycle. Intermediate term bottom is expected early July.
Here is the big picture - probably ~18 weeks long cycle and bottom of the 20 and 40 week cycles early July expected.
If we see higher low I must revise probably the cycles and mark 40 week bottom on the 4-th of June which means 23+14=37 week long cycle which fits perfect with the average length and the previous four 40W cycles. The smaller cycles do not fit into the bigger ones but... who knows. Sorry but I am not a cycle professional but I follow them because they are interesting tool and have added value.

Tom Demark SEQUENTIAL AND COUNTDOWN - this technique spots areas of exhaustion.
Last week I have mentioned that setup(shown in red) on the SP500 was negated because of 0,11 points. The DJ Industrial do not have this problem:). We had similar situation in March - the SP500 finished 13 combo on the weekly chart, on the DJ it was negated, and eventually the combo played out perfect. I am not sure how to handle such situations. Sorry again I am not a professional I have just read the book from Tom Demark and I count manually:)
My suggestion until negated - the weekly chart is more important than the daily and SP500 finished buy setup 9 bars on the weekly chart. If this is the real deal we count the setup (the red one) on the daily chart, the countdown and the combo are canceled(because of a setup in the opposite direction) and this move lower should not break the TDST Line which is the true low for the setup or the lowest point of bar 1 ~1285 - that is the scenario with higher low.

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