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Stock Market Strong Rally Extension in Doubt

Stock-Markets / Stock Markets 2014 Nov 03, 2014 - 11:48 AM GMT

By: Andre_Gratian


Current Position of the Market

SPX: Long-term trend - Bull Market

Intermediate trend - Intermediate correction (primary wave IV) still underway (???).

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.

Daily market analysis of the short term trend is reserved for subscribers. If you would like to sign up for a FREE 4-week trial period of daily comments, please let me know at


Market Overview

Had it not been for the BOJ 's surprise move, the rally in the SPX might have ended (temporarily) on Thursday. Instead, a rash of speculative buying and short-covering took place sending the index to within one point of its previous all-time high. The DOW did even better by making a new high! But the next few weeks may not be so conducive for the rally to continue. Strong dissention by some reliable indicators is telling us that this bullish exuberance may soon come to an end, perhaps as soon as next week! I will show them to you a little later, but let's first dissect the market into some individual components:

Momentum: The weekly MACD has now (barely) turned up but, at the same time, it has increased its negative divergence to price, dramatically. The daily MACD has now become positive and its histogram is still increasing, suggesting that there is still no loss of momentum in that index. It took Friday's strong advance to finally engineer a bullish cross in the hourly MACD, but it remains well below its high of October 22 and, by the end of the day, was already losing its upside momentum.

Breadth: The McClellan Oscillator has managed to remain positive and even move to a new high of 84.99 on Friday, its highest level since the September 2013 high of 86.76, which makes it extremely overbought and vulnerable to an imminent correction. Of course, this has helped the Summation Index to continue its rise from its oversold condition of over -600 to a current reading of -5.30. In spite of its recovery, the index remains in a state of major negative divergence to the SPX.

Structure: "The strength of the rally has raised some questions as to whether primary wave IV is already complete and if we are already in wave V." This was the situation last week, and it is even more so this week. However, observing EW strictly, as long as we remain in a 3-wave up-move, we are forced to still consider this as wave B until such time as a five-wave structure is formed. Should it take place, it would have implications which will be discussed if and when it happens.

Accumulation/distribution: The degree of distribution at the 2019 top was far greater than the small pattern which was formed at 1820, and yet, here we are, back at the top! On a bar chart, it has the looks of a V bottom.

VIX: The inverse VIX has been a reliable indicator for its warnings about potential important trend reversals, and it is now screaming with the intensity of a World War II London siren signaling an imminent bombing raid. Should we ignore it as another indicator that should be discarded? This would be unwise.

Cycles: "It is possible that the recent decline was only the work of the 4-year cycle and that the lows of the long-term Kress cycles are still ahead of us." That is going to be my view for quite some time and we may have to wait for a couple of years to prove it correct. In the meantime, some intermediate cycles are due to top in early to mid-November.

Chart Analysis

Our first chart will again be that of the weekly SPX (chart courtesy of QCharts, including others below) with the McClellan Summation Index posted underneath it.

SPX Weekly Chart
Larger Image

The chart shows that a peak was made at 2019, followed by a 3-week decline to 1820, and another 2- week rally back to 2018 ending last Friday. Talk about volatility! The SPX found support on an intermediate trend line from October 2011, ostensibly the bottom of primary wave II of the bull market. So, if primary wave IV started at 2019, is it possible that we could still be in the B wave of wave IV after retracing the entire decline? Anything is possible until it has been proven otherwise and, so far, this has not happened. We should still be looking to future market action to tell us.

Whether we look at the price oscillators or the breadth oscillator, all we see is substantial negative divergence. It is true that if we continue to rally for several more weeks, that divergence will eventually disappear. But is this realistic? We'll look at the daily and hourly charts for some clues.

I have condensed the daily chart to emphasize the most recent activity. I have also added the daily raw data of the A/Ds as an indicator for reasons that I will explain later. It is from this data that I create the oscillator below.

SPX Daily Chart
Larger Image

Let's start by analyzing the price. It has been an uninterrupted climb from the 1820 low back to the 2019 top. We went back up faster than we came down in a series of daily higher highs and lows, with the exception of one day which did not quite make a higher high. I have not done the research, but I am certain that few 200-points rallies in the SPX have matched this type of upside momentum. And yet, the pattern is describing a wedge -- supposedly a weak pattern. Furthermore, on Friday the price went through the top of the wedge in a blow-off manner which often signals the end of an advance. And, former tops normally offer some initial resistance. But, as you will see, it goes much farther than that. The A/D, at the bottom, which is not only overbought, but has refused to go higher for the past 8 days.

Now, let's look above at the raw A/D data. We can see that on Thursday, there was some severe divergence between where the A/D closed and the price (which had made another new high). Other factors had led me to expect a reversal to take place on Friday with the green uptrend line on the indicator being broken as a price retracement started. I believe that the unexpected move by the BOJ delayed this from happening by one or two days at the most!

Now I am going to show you a couple of charts which depict the mother of all divergences in an indicator which has been very reliable in warning of imminent reversals. The top chart is the DJIA and the bottom one the inverse VIX (XIV). I don't think that too much explanation is required. The charts show several examples of short-term and longer-term divergences identifying every top in the past four months. I would think that these charts would slightly lessen the bulls' confidence that this rally is going to continue.

Dow Jones Daily Chart
Larger Image

One more chart (courtesy of is worth perusing! It is the S&P 500 bullish percent index. It is made up of completely different data than the XIV, and yet it is almost identical to it, showing the same divergences in the same time frames. It will be interesting to see if they both give us an accurate perspective of what is ahead for the stock market.

BPSPX Daily Chart

We should look at one more chart, that of the SPX hourly chart.

In my last letter, because of the divergence showing in my oscillators, I mentioned that we would probably see some weakness early the following week. Instead, the price merely changed its angle of ascent with buying in anticipation of the FOMC statement supporting the price. On Thursday of last week, again I had expected the index to roll over the next day, but the BOJ came to the rescue of the bulls. Will the third time be a charm? With the lack of follow through after a strong first hour, Friday morning again placed the indicators in the same precarious position. Will the anticipation of a good jobs report at the end of the week again prevent a correction from occurring, or will it simply make it a minor one?

SPX Hourly Chart
Larger Image

Sentiment Indicators

With the rally in equities, the SentimenTrader (courtesy of same) long term indicator remains at 50 -- not exactly what one would call a bearish reading.

Weekly Sentiment Readings
Larger Image

VIX (NYSE Volatility Index) -Leads and confirms market reversals.

VIX mimics SPX, but in reverse. Therefore, when SPX corrected 200 points, VIX went sharply in the other direction, and when SPX rallied back up to its former high, VIX also did the same - in the other direction. Well, not quite! It left some room at the bottom by not going quite as low as the low corresponding to the first top - which, itself exhibited some divergence to the price and thereby announced that a reversal in SPX was about to occur. It is doing the same thing once again, giving a warning that we may be at another important top. Of course, its inverse (XIV) which I posted above is giving a much stronger warning and is much more graphic because it goes in the same direction as the market.

VIX 4-Hour Chart
Larger Image

IWM (iShares Russell 2000) - Historically a market leader.

IWM had a good rally from the low, but not quite as good as the SPX because it did not make it back to its previous top. Also, Friday's surge created a gap which could turn out to be an exhaustion gap!

IWM 4-Hour Chart
Larger Image

If it turns down from here, it is a given that it will lead the market in a correction of sorts.

TLT(20+yr Treasury Bond Fund) - Normally runs contrary to the equities market.

After a strong move to the top of its expanded channel in conjunction with the market decline, TLT corrected sharply as the market went up but remains well above the former low which corresponded to the market high. In fact, this is about as great a divergence as there is in the XIV.

TLT 4-Hour Chart
Larger Image

GLD (ETF for gold) - runs contrary to the dollar index.

Ouch! Breaking that support level took GLD down to the bottom of its steepest channel. Its trend has been accelerating downward and has a little more time remaining to reach the bottom of the 25-wk cycle. It might even make it to the nearest bottom red trend line by then.

Gold WTF 4-Hour Chart
Larger Image

UUP (dollar ETF)

Funny how that looks like GLD in reverse! UUP may have now started on its wave five from the May bottom. It does not look complete but could be by the time GLD reaches its cycle low in another week or so.

Dollar ETF 4-Hour Chart
Larger Image

USO (US Oil Fund) - following chart courtesy of

For the moment, USO appears to have reached a short-term projection level but could extend its decline by a couple more points, closer to the bottom of the larger channel line.

US Oil Fund 4-Hour Chart
Larger Image


It is unclear what the market is doing structure-wise. Perhaps we are still in wave B of 4, or perhaps the pattern is evolving into something else.

However, there is convincing evidence that we are quickly approaching another market top. While we cannot easily disregard the strong, unprecedented short-term price momentum, the bulls should probably consider the also unprecedented extreme negative divergences showing in the McClellan Summation index, SPX bullish percentage index, TLT, VIX and, most of all XIV. Due to the collective severity of these divergences, it would be irrational to dismiss the possibility that they are pointing to another, perhaps substantial, decline. But then, by some standards, this has been an irrational market seemingly prone to more and more extremes!


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Disclaimer - The above comments about the financial markets are based purely on what I consider to be sound technical analysis principles uncompromised by fundamental considerations. They represent my own opinion and are not meant to be construed as trading or investment advice, but are offered as an analytical point of view which might be of interest to those who follow stock market cycles and technical analysis.

Andre Gratian Archive

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