Stocks Move Above Strong Resistance Levels

October 28th, 2011
in b2evolution

by Erik McCurdy,  Prometheus Market Insights

market-up-down The S&P 500 index closed sharply higher today, moving up to a new high for the uptrend from early October and breaking above strong resistance at the congestion zone in the 1,260 area. The rally also moved above the 200-day moving average near 1,274, which transformed from strong support into equally strong resistance following the violent breakdown in August.

Follow up:

Click on charts for larger image.

Although technical indicators are bullish overall on the daily chart, the move from early October has advanced at an unsustainable rate, gaining more than 19% during the course of four weeks. Therefore, the short-term uptrend will almost certainly be followed by a violent overbought correction. At a duration of 18 sessions, the alpha phase rally of the current short-term cycle is overdue for a reversal and the Alpha High (AH) could occur at any time during the next few sessions.

After the AH has formed, a brief alpha phase decline of less than six sessions in duration followed by a quick move above the AH would reconfirm right translation and favor additional short-term strength. Alternatively, a failure to move well above the AH during the beta phase rally would suggest that cycle translation is in question and forecast a move down toward recent short-term lows during the beta phase decline.

From a long-term perspective, the developing cyclical bull market breakdown continues to proceed as expected. Although you will soon be reading financial media headlines celebrating the large gain during the month of October, the vast majority of those articles will undoubtedly fail to analyze the rally in its proper context. As we have noted on many occasions during the past two years, the stock market entered a period of heightened long-term volatility when the cyclical downtrend from 2007 accelerated into a true market crash in 2008. Consequently, every trend and countertrend since then has been a violent, extreme move as shown on the following monthly chart.

The October monthly gain may very well prove to be the largest in 24 years, but it is a normal development given the current phase of the secular downtrend from 2000 and certainly not the sign of a healthy market. The stock market continues to track the scenario that our computer models have been monitoring since the cyclical bull market broke down in August. The next assessment of long-term health will be provided by the rally phase of the new annual cycle that began in October with the confirmed formation of the latest Annual Cycle Low (ACL).

We will identify the key developments as they occur in our market forecasts and signal notifications available to subscribers.









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3 comments

  1. Roy Chesnut says :
    *****

    Questions

    1 This statement is not clear to me. Does this mean that the market could reverse and decline to AH (1220) soon?

    At a duration of 18 sessions, the alpha phase rally of the current short-term cycle is overdue for a reversal and the Alpha High (AH) could occur at any time during the next few sessions.

    2 This statement is confusing too. Hasn't the AH already formed, as per your chart? Or is this a new AH? If the AH you refer to is S&P 500 level 1220, as per your chart, does this mean that 1220 will be revisited and then, the "quick move above the AH reconfirm..." mean a rise above 1220?

    "After the AH has formed, a brief alpha phase decline of less than six sessions in duration followed by a quick move above the AH would reconfirm right translation and favor additional short-term strength"

    3 What is STCL?

    Thanks
    Roy

  2. Admin (Member) Email says :

    Roy - - -

    Erik may want to reply but I will jump in for the meantime.

    1. Erik anticipates that a reversal could occur at any time. The implication is that there will be resistance encountered by this decline at 1220 but I don't think that Erik would say the decline would only go just that far. It could go further, all the way down to the next resistance at 1125 or at an intermediate lesser resistance, say the 50-day ma.

    2. He is referring to a new AH. This will be wherever the new top forms, but definitely above 1220 since that price has already been left in the dust for this advance. The quick move above the new AH refers to the advance that occurs after a brief decline, should that be what develops. If the decline is much longer than the six sessions Erik mentions then the further discussion does not apply. He is trying to describe a scenario that would play out if there was going to be a further advance in the coming weeks.

    3. STCL is short term cycle low.

    If I have messed up this reply I am sure Erik will clarify.

    John Lounsbury

  3. Erik McCurdy Email says :

    Hi Roy,

    1. John is correct. A short-term reversal at the overdue AH is imminent, but we will simply have to see how far the resulting alpha phase decline retraces. The magnitude and duration of the decline will provide the next assessment of overall market health.

    2. Again, John has it right.

    3. Correct, STCL stands for Short-Term Cycle Low. For an introduction to cycle analysis (and our terminology), see this article:

    http://www.prometheusmi.com/2011/03/10/cycle-analysis-primer

    Best, Erik







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