In the last letter, I discussed the evidence building up warning that we were getting close to an intermediate top. I had also mentioned that there appeared to be some correlation between GDX making a 52-wk low and top in SPX. Ideally, the 52-wk cycle of GDX was supposed to bottom next week, but it looks as if it has already occurred. If that relationship continues, SPX should be just about there, and what better time to reverse than next week, when Congress passes the tax bill (now that the entrenched hold-outs have relented), with traders selling on the news. Of course, if it does not pass, the effect on the market is predictable.
The last accumulation pattern of the SPX occurred at the 2635 level and created a potential count to about 2690+ maximum, and we could find some confirmation of that projection in the pattern just formed last week. So, let's see what happens over the next few days.
Chart Analysis (These charts and subsequent ones courtesy of QCharts)
SPX daily chart:
You may notice that the market strength has forced me to redraw some of the larger channels in a more conventional way. Prices are no longer squeezed against the channel tops, but could still move higher before touching them. The top (black )channel is also best drawn as a wedge pattern which suggests that the final wave is most likely and ending diagonal triangle, which is a terminal pattern.
We discussed several other conditions besides channel resistance and projections which are associated with market tops. These include EWT wave completion (as an EDT), cycles bottoming directly ahead, and negative divergence at the weekly and daily indicator levels. If you look at the oscillators at the bottom of the chart, you will see that negative divergence is very plain, and this tells us that in spite of the apparent price strength, there has been a significant loss of momentum over the past couple of weeks. In fact, the volume pattern also suggests that distribution is most likely taking place. Notable was the DJIA's huge spike in volume on Friday, as it barely cleared the former high.
