Oct 26, 2013

Weekly review

Short term view - up until FOMC
Intermediate term view - we should see an intermediate term top in the next week or two

Ok no pullback it was more a sideway move this week. The "more bearish" scenario so to speak, top at the upper wedge line is invalidated. I was a little bit skeptical because too many were watching the wedge already so the consequence usually is that the target is overshooted and that confuse most of the traders. Not that SP500 broke decisively above it but it is taking too long and with FOMC on Wednesday I do not expect a top before that. Remember the previous meetings? always a top or a bottom... spooky:)

Short term - I think FOMC will be a top, the question is short term or intermediate term top. I see two scenarios they are shown on the daily chart.
The big picture - you know my forecast already. The weekly chart first posted on 4-th.June almost 5 months ago - the circled areas are preceded by a rally which lasts longer and moves faster than the average one, this leads to excessive greed and its usually purged with sharp correction. The next move based on statistic and history should be 15%-20% correction. Cycles says this move should top in a week or two and correction for roughly 10 weeks should follow(see cycles bellow for explanation). Indicators - there is enough divergences to support such a move. Margin debt at record highs, I saw somewhere chart with mutual funds inflow - a lot of in the last several months, average Joe is back.

I was missing one ingredient - aggressive bullishness. Man this week going through the bloggs..... the bulls are everywhere and are very aggressive. After almost a year moving higher, WITHOUT a normal correction(8%-10%), everybody are great traders next stop 2000. If you mention a correction and you are an idiot, the FED is printing money bla bla nonsense, we will never see a correction any more, sentiment through the roof:) Investor's Intelligence bull ratio never dipped below 55% for over two years. Its currently back at 73%, the AAII bull/bear ratio is at whopping 73%. That is exactly what I want to see around tops.... if you ask me we have a green light for the correction.

This is the logic and the analysis above and now listen carefully - if the SP500 moves bellow 1740 you have a road map, BUT until than do like the bulls - party, sing "Kumbaya My Lord" and shout up-up-up to the Moooooon... have a great weekend:)

Short term - I expect some kind of a top after FOMC. MA50 could be tested first for a flat correction, or just grinding higher... I do not know.
- Triple cross(EMA10 and EMA20 crossing EMA50) - triple cross is positive, short term trend is up.

Intermediate term - The two scenarios which I see - FOMC is intermediate term top(green) and than a correction after a rally for almost a year begins, or FOMC is short term top(red) and there will be one more push before a correction.
- Trend direction EMA50/MACD - the intermediate term trend is up.
- Momentum Histogram/RSI - momentum is up, short term trend is up.

Long term - The pattern is still intact, MACD is struggling not to break its trend line... the bulls should master strong rally to negate all divergences and the historical pattern.
We have a rally which lasts almost a year without a correction and I still think that this leads to excessive greed and the consequence is always a sharp correction to purge the greed from the system. This shows us the pattern and I do not think that this time is different. It is always the same and only the excuses are different.
- Trend direction EMA50/MACD - long term trend is up - the price above MA50 and MACD above zero.
- Momentum Histogram/RSI - momentum has turned up, the intermediate term trend is up.

The Market Breadth Indicators - the same story, they look better buy signals, but the divergences are still there.
McClellan Oscillator - diverge at overbought levels...
McClellan Summation Index - buy signal, but still lower high
Weekly Stochastic of the Summation Index - still a sell signal.
Bullish Percentage - buy signal, but lower high and triple divergence.
Percent of Stocks above MA50 - overbought levels reached again. Short term and longer term divergence building at the moment.
Fear Indicator VXO - building a bottom... a looot of complacency again.
Advance-Decline Issues - overbought levels reached, expect lower high with divergence.

The scenario that we already saw 20 week cycle low and we are currently in week 3 of the last one for this 18 month cycle has much higher probability after we did not see reversal last week.
Take step back and look at the big picture.... what we have till now? - three 18 month cycles. The first peaked at week 59 and we saw 10 weeks correction. This is late in the cycle, which is not surprise after severe bear market and 9 year low. The second one peaked at week 43 but the real correction started at week 53 and lasted 12 weeks. The third one peaked at week 51 and the correction lasted 9 weeks. To summarize - the last 20 week cycle peaked at week 59/53/51 and correction for 10/12/9 weeks has followed. I do not see a reason why this time should be different. We are currently at week 3 of the last 20 week cycle or in week 49 of the 18 month cycle. If the history repeats we should see a top in the next 1-2-3 weeks and roughly 10 weeks correction.

The daily chart did a great job again. At the moment we are at day 13. If I am right this 40 day cycle should top soon and a move lower into the second half of November should start.

I expect to see in the next several weeks the top of the last 20 week cycle the 40 week and 18 month cycle.
Look at the chat closely and make your own decision.... I think it is always the same and the history repeats.

Tom Demark SEQUENTIAL AND COUNTDOWN - this technique spots areas of exhaustion.
It looks like that the daily and weekly charts are peaking together. This is the strongest signal which you want to see at important top or bottom.
On the daily chart all counts has been finished this week. On the weekly chart 8 of the setup is almost sure and for 9 of the setup is not even necessary to make a new high.
I think the setup will be finished and new ATH is not necessary. The weekly chart favors a little bit more the bullish scenario but it is not a must.

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