A 3-dimensional approach to technical analysis
Cycles - Breadth - 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
Current Position of the Market.
SPX: Long-term trend - Election years that fall in the 8th year of the Decennial pattern call for consolidation in the early part of the year followed by a strong finish. This is the pattern that the market has made so far this year. But the 6-yr cycle which is scheduled to bottom in late Summer/early Fall could play a restraining role, followed by an eventual bull market top in 2009-2010.
SPX: Intermediate trend - The intermediate correction came to an end on 3/17. The index is now in a cautious uptrend which is about to undergo a short-term consolidation.
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 determines the course of longer market trends.
The past two weeks have seen little change in the market behavior. The SPX has continued to edge up in a tentative manner, making new highs, nevertheless. Last Friday was options expiration and this may have helped the index to eke out a few more points on the upside which barely surpassed its high of two weeks ago. But both the chart pattern and the breadth figures on Friday suggest that we have arrived at a short-term top and that a consolidation is in the offing.
The cyclic configuration into the end of the month when the 20-wk cycle is due to make its low would agree with this scenario. But with longer cycles still in their uptrends, and the economic news reassuring investors that the worst may be behind us, the anticipated 2-wk decline should not have a major impact on the intermediate uptrend. What is more important to the market's fate is what happens after the first of June. This will give us some clues about the continued viability of the intermediate uptrend. I am still of the opinion that a pull-back into the Fall will occur before we can challenge the bull market highs.
One should note that the Dow Jones Industrials and S&P 100 did not make a new high last week, and that the banking and financial index are still lagging very badly. Also, sub-par breadth and volume are suggesting that the bullish sentiment is not universal.
Chart pattern and momentum:
On the chart below, notice how the SPX is moving into a wedge pattern. This reflects the lack of upside momentum which normally results in a reversal. It is confirmed by the momentum oscillator which, after bouncing off its trend line, has moved back to overbought with slight negative divergence. But the A/D oscillator at the bottom of the chart is where the negative divergence is much more apparent . It has remained positive as the index has moved higher, but each small wave up has become weaker and weaker. This is a pattern which is very similar to the one going into the October 2007 high. This does not suggest that it will be followed by a similar decline, only that a reversal normally occurs when prices and breadth describe this type of pattern.
Note also that the index is reaching the top of its down channel where it should find at least some temporary resistance.
The rally from the mid-March low of 1257 is well-defined by a 3-point trend line. This trend line lies about 25 points below Friday's close and, when broken, will signal the beginning of the consolidation. The indicators carry similar trend lines which can be expected to be broken as well.
Still no clear sign of the 9-mo cycle, so we'd better forget about it and move on. It is not unusual for this cycle to be a non-event. In late October 2006, it only caused a one-week decline before prices turned up again.
The next cycle of import here, is the 20-wk cycle and it is due to bottom towards the end of the month. Its impact has been varied in the past, depending on other factors which were present at the time it was making its low. Unless the 9-mo cycle is bottoming late and will add its pressure to that of the 20-wk, it does not look as if the pull-back will be that severe. Just a consolidation in an intermediate uptrend.
There is a minor cycle bottoming on Monday and a nest of cycles and CITs due about next Friday. The next Bradley turn date also falls on the 27th, adding to the probability that some sort of a short-term low should be made in that time frame.
The last newsletter stated: There are 3 potential SPX projections to the upside for the end of the rally. The first was 1423 and was reached on Friday (5/1)... By reaching that level, the SPX had to go decisively beyond 1396, which it had resisted doing until last week. This triggers two other potential projections to higher levels: 1438 and 1470. At a maximum, if internals improve, the index could reach 1480.
These upward projections are still valid, but not likely to be filled until we have a consolidation into the 20-wk cycle low. If the retracement alters these targets, I'll revise them later on. On the downside, 1360 looks about right for the decline into the end of the month. This presumes that the SPX will break below its 1385 low. It also assumes that the index made its high last Friday. If it goes a little higher before reversing, the projection will be somewhat altered.
I could repeat exactly what I said in the last newsletter because very little has changed in the breadth pattern. The numbers reflect a lack of enthusiasm on the part of investors, with just enough issues participating to keep a not-very-dynamic uptrend in place. This leads me to believe that the uptrend is on borrowed time. That could change after the 20-wk cycle has made its low and it adds its upward pressure to the longer-term cycles instead of working against them.
For the short-term, whether you look at daily or hourly breadth, the figures show a diminishing lack of participation in advances over declines, especially since the beginning of the last upphase which started at 1385.
The volume has also become weaker and weaker as the uptrend has progressed. This is in synch with the pattern shown by the A/D over the past few weeks.
It is not a bullish scenario.
Market Leaders and Sentiment
The contrast between the NDX and GE has continued to expand. The former has kept on moving up, dragging the SPX behind it, while the latter has gone nowhere. Here are the daily charts of the three side by side. The NDX is the most bullish and GE the least. This is not the picture of a market which is "together". When you consider the poor breadth and volume patterns, and you look at this trio, you can see why many investors are saying: "I think I'll stay in cash for a little bit longer!".
Incidentally, the banking index is looking somewhat like GE, and the financial index continues to be one of the weaker indices. In a healthy market, these indices normally lead. They definitely are not, at this time.
As a sentiment index, the VIX is not always reliable in calling tops in a timely manner. For instance, in the Fall of 2006 and beginning of 2007, it remained at a very low reading for several months. But then, the stock market had just made its 4-yr cycle low. We are not in the same relative cyclical environment today. In fact we are only 4 or 5 months away from the bottoming of some long term cycles. So we should pay attention to the fact that the VIX is at a level comparable to October 2007 -- the high of the market. In "chart Pattern and Momentum" above, I mentioned that the daily A/D pattern (as reflected by its MACD) was also similar to the one which preceded the October top. In spite of this confirmation of potential market weakness ahead, I still do not think that we are facing the same kind of decline. At the October top, the market was long-term overbought and was facing a plethora of negative news ahead of it. Neither one of these conditions exist today. Still, caution is advised for the next couple of weeks.
There are ample technical signs that the SPX is getting ready for a short-term correction into the low of the 20-wk cycle which is expected at the end of the month.
The few weeks that follow that low will determine how much longer the intermediate trend will last before prices are pulled back down into the long-term cycles bottoming in the Fall.
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