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January 30, 2006

Turning Points
by Andre Gratian

A 3-dimensional approach to technical analysis
Cycles - Structure - Price projections

"By the Law of Periodical Repetition, everything which has happened once must happen again, and again, and again -- and not capriciously, but at regular periods, and each thing in its own period, not another's, and each obeying its own law ... The same Nature which delights in periodical repetition in the sky is the Nature which orders the affairs of the earth. Let us not underrate the value of that hint." -- Mark Twain

A Review of the Past Two Weeks.

The bottoming of the 10-week cycle had a severe effect on the Dow Industrials, Nasdaq and SPX, but a lesser one on the NYSE Composite, the Russell 2000 and the Transportation Index. The latter three have already made new historic highs, and the other three may in the next few days, BUT....! (see below)

The new high/new low index has been performing rather well in the past few weeks, which would be expected with several indices in record territory, but the A/D which is the more sensitive, and the more short-term oriented breadth indicator is flashing warning signs.

Gold appears to have lost its upside momentum and is building a congestion area which could either be a re-accumulation level or a distribution top, while the US Dollar had a sharp sell-off followed by an immediate reversal.

Oil reversed lower after nearing its all-time high. The chart pattern of oil for the past few days is the mirror image of the US Dollar.

Current Position of the Market.

SPX: Long-Term Trend - All equity indices are at a critical juncture, exhibiting major topping behavior.

SPX: Intermediate Trend - The brief, sharp correction is over and the recent highs could be challenged in the next few days.

SPX: Short-Term Trend - After a short, sharp correction, the short-term trend is once again up and very likely nearing a top.

Because of market volatility, the short-term trend is better analyzed on a daily basis with the help of hourly charts. This is done in our daily market updates and Closing Comments.

Daily Market Analysis: If you would like to receive an explanation of how I arrive at buy and sell signals and sign up for a free 6-week trial period of daily comments, please let me know at ajg@cybertrails.com.

What's Next?

The Long Term: The action of the next few days -- more likely few weeks -- is critical in determining the long-term status of the stock market. The dichotomy between the various indices (.eg Dow Industrials and Russell 2000) could be misleading and hide a far greater uniformity than is readily apparent - that of the formation of a major bull market high! There are many signs pointing to this, and I will list a few of them below:

1- One sign is the increasing divergence of performance between the Russell 2000 and the Dow Jones Industrials. A classic signal of a major top is that smaller and more speculative companies gain in favor at the expense of larger, more established "investment-grade" corporations. Although this is not yet extreme in this bull market cycle, it is apparent that the Dow is being left farther and farther behind. And keep in mind that the Russell is at an all-time high, while the Dow has not been able to come close to its 2000 top.

2- Even more flagrant is the fact that I now receive a dozen or more emails every day advertising Penney stocks. This practice started a few weeks ago, but has rapidly been gaining momentum. Besides being a real nuisance, if there ever was a red flag advertising a major top, this is it!

3- In the past, I have commented on GE's legendary ability to forecast market turns. Lately, because GE has been under-performing the market for such a long time, I had thought that it might no longer be a good leading indicator. But when I look at GE's weekly chart (which I will show in the chart section), I am not so sure that this is true. It is very possible that this stock's performance may be anticipatory of what is coming in the overall market.

4- A few months ago, I also expressed doubts that the Dow Theory was still as valid an indicator as it was at one time. But it is becoming clear that it is about to prove its historical value once again. In the chart section, I have also included charts showing the relative performance of the Industrial and the Transportation indices. We'll analyze these separately, later.

These four points should be enough to illustrate my concerns about the long-term position of the stock market. I have stated previously that these concerns also extend to its very-long term position. However, I do not think that we are quite finished with this move.

The Intermediate term: Nevertheless, what I do believe is that we are approaching the top of an intermediate-term trend. The negative short-term divergences are abounding and, although divergences are only preliminary signs that can be nullified by subsequent stock market action, the position of the indices relative to the indicators makes it doubtful that this will be the case this time. I will show you why when we analyze the daily chart of the daily and hourly SPX charts in the chart section.

Other signs include the lagging performance of the Nasdaq relative to the SPX, and the fact that the best price projection I can get from the recent VST base caused by the bottoming of the 10-day cycle, is a range of 1294-1302.

I was not even sure if the 10-day cycle had already failed or not until Friday, when the QQQQ decided to join the SPX in its rally. The action of the A/D was also suspicious -- and still is.

I will now conclude this newsletter with the analysis of the charts in the chart section and not comment further on gold, oil and the Dollar, but let it go at what was said in the review section, above. The recent Palestinian elections have raised the already high level of instability in the Middle-East to a new level, and these markets need time to digest this new event.

Charts

The first chart is that of the SPX daily. The first thing which is obvious, is that the prices are still pushing against the top of the intermediate channel. The top line has now 3 points of resistance and because the current move is extended and has not had and adequate correction (a function of the cyclic pattern), it will be very difficult to sustain much longer the move which began in October. And speaking of cycles, the very dominant short-term cycle has now completed nearly 2/3 of its span and will be adding downward pressure every day from here on.

Above, I stated that the VST (very short term) price projection was probably 1294, which would represent a double-top, and at the most, 1302. As you can see, those projections also correspond to the top of the channel.

The positions of the indicators appear to support the idea that only slightly higher prices are probably into a top. The MSO made a new low on the recent pull-back and would have to overcome its former high to get back into an uptrend. This is very unlikely since it would require an immediate price move significantly beyond the current price objective.

The A/D oscillator also is showing weakness. Not only has it retraced most of its former upswing in the latest pull-back, but it has not regained much of the lost territory since then.

While the BSP (buying/selling pressure) index signaled that the retracement (characterized as a "massacre" by one of the CNBC commentators) was not anything to be concerned with, it is still in an uptrend and is neutral at this time.

The next chart is an hourly chart of the same index, and next to it, an hourly chart of the QQQQ. The lower indicators are two different interpretations of the A/D figures.

Note that the QQQQ is currently lagging the SPX and is having a little more trouble with the VST overhead resistance.

Note also, that both MSOs are overbought, neutral with price, but have not yet given a sell signal.

By contrast, both A/D oscillators are showing negative divergence but will probably require a little more time to work themselves into a significant sell position.

The third set of charts are those of the Dow Industrials and Dow Transportations. The trend and channel lines are drawn according to Andrews pitchfork methodology and clearly represent the trend of these two indices over the past 9 months. Note that the Transports have been restrained by the upper channel line and notice the tentative price action as they approach it once again. The Industrials are now constrained to the second tier of that channel and are losing upside momentum fast, having just had their most significant downside penetration of the median (heavy) line. Note also that they recently made a triple bottom which looks like it could easily be penetrated decisively the next time around. And, of course, you can't ignore the divergence which is showing in both MSOs (bottom oscillators) which have been making a series of lower highs and lower lows.

It would take a lot of immediate strength in both of those indices to reverse the tone that is shown by these charts. Of course, their most important features, which are not apparent here, is that they are now exhibiting a classic Dow Theory non-confirmation pattern for the long and very long term trend.

Finally, the last graph is a weekly chart of GE which has seemingly already given up any pretense of still being in a bull market pattern.

SUMMARY:

The long-term trend could still have a little left in it, but the short and intermediate trends look terminal.

Andre Gratian
MarketTurningPoints.com

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.

I encourage your questions and comments. Please contact me at: ajg@cybertrails.com.

Copyright © 2004-2008 Andre Gratian

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