Current Position of the Market: Strong Intermediate Reversal Warning

• SPX Long-term trend: There is some evidence that we are still in the bull market that started in 2009, a market trend which could continue into 2021 until major cycles take over and it ends. A move up to ~4500 is possible before the current bull market makes a final top and SPX corrects into its next major cycle low due in 2023.
• SPX Intermediate trend: SPX should now have reached its next intermediate top.
• Cycles: Looking ahead.
• Seven-year cycle – Last lows: 2009-2016. Next low: ~2023.

Market Analysis: SPX vs. IWM (Comparison and Warning)

There are many ways that a technical analyst can determine the state of the stock market. We know that the latter progresses in stages, a bullish phase followed by a bearish phase, followed by another bullish phase, etc. This process repeats itself ad infinitum over the short-term (days), the intermediate-term (weeks), and the long-term (months).

One of the most reliable ways to determine the future intermediate market trend is by comparing the action of IWM (Russell 2000 ETF) to SPX (S&P 500). As far as I know, IWM has never failed to predict the end of a trend in SPX by topping ahead of it, though the warning period can vary greatly. On the charts below, we can see that just ahead of the severe decline into March, the warning only came about a month ahead of time. So, what is IWM telling us today?

The charts posted below are weekly charts, best suited to forecast the intermediate trend of the market. Three market phases are well-defined on the charts, plus the beginning of a fourth (possibly incomplete) one. During phase 1, the two indices performed similarly, with IWM only slightly underperforming SPX.

During the second phase, IWM made up for it by outperforming its market counterpart. After that, starting in early March of this year, IWM started to show some relative weakness. This continued until mid-July, during which time SPX -- primarily propelled higher by NDX -- continued to move aggressively higher.  

We now come to the most important period of this analysis. SPX had a brief one week decline at “3,” while IWM declined for four weeks during that relative period, dropping back to the level at which it traded at “2” (3/01). For the next month (which brings us to Friday’s close) SPX progressed higher, past its 9-dma, while IWM could not get past it and even turned down last week, and SPX continued still higher.  

Conclusion: I have warned for some time that we were coming into an intermediate market top and so has IWM. That warning reached a heightened level last week. We should listen.

SPX Daily Chart

This is the daily rendition of the SPX weekly chart starting at “2.” I did not display IWM, but you can learn what it did during this period by looking on the chart above. Focus particularly on the period at the start of “3.” After a quick move upward fostered by a new phase of the short-term cycle, SPX did not do much, trading in a range limited on the upside at ~4430.

For some time, I have had a projection to 4440 dating from the P&F pattern made at the 3723 re-accumulation low, and it looked as if we were preparing to touch that level and reverse in conjunction with the down phase of the short-term cycle. Instead, the index started to crawl higher closing at 4468 on Friday, seemingly disregarding both the 4440 target and ignoring the down phase of the short-term cycle.  

I will next continue this analysis with the hourly chart. But I first want to point out the negative divergence which has persisted in the CCI for the past two weeks; adding to the perception that we are about to get a price reversal.  

SPX Hourly Chart

This chart represents the ending phase of the last short-term cycle and the beginning phase of the new cycle, which should now be in its down phase but instead has found new life and is moving higher. Also, instead of rolling over after meeting the 4440-projection, the index appears to have made another short-term re-accumulation phase above 4373, pointing to a potential move to 4480.

This may be the level for which the index is aiming before pulling back. It is also possible that the cycle has ‘extended,’ and will start retracing when that level is reached or approximated.

In any case, the process should clarify itself over the next couple of days with the breaking of the last small trend line which starts on Aug. 3, perhaps with a sharp retracement if the cycle low was indeed delayed. This scenario seems to fit in with the warning of the IWM pattern. If you are a bull, some caution may be warranted.

GDX (Gold Miners) Daily Chart 

GDX is currently retesting its former March low and it may not be done -- at least there is no sign of it yet. More time is required. 

PAAS (Pan American Silver Corp.) Daily Chart

PAAS has moved back to the low of its corrective pattern and it also needs more time to determine whether it is capable of establishing a base at this level.  

BNO (Brent Oil Fund) Daily Chart

BNO is looking increasingly toppy and will start to correct when it breaks its trend line. This process may already be underway.

USD (US Dollar) Daily Chart

To move back to its top channel line, USD would have to retrace .382 of its intermediate decline to 95. That could be a challenge, but feasible, so long as it remains above 90.

Summary

This is the strongest warning yet issued by IWM since the beginning of the March 2009 bull market. It should be heeded.