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.
Long-term trend - The Dow Jones Industrials may be deviating from their typical decennial pattern in an election year. Important cycles going into the Fall could be the reason for this, but one also has to consider the possibility that the downward pressure from the 120-yr cycle, which is due to make its low in 2012-2014, has begun to take effect and that October 2007 was the top of the bull market. This is not yet confirmed and remains only a possibility.
SPX: Intermediate trend - Last week's action suggests that the intermediate trend correction may have run its course, but a test of the low is quite probable.
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 saw climactic selling followed by a significant reversal, indicating that at least one, and maybe both, of the two long-term cycles that I was expecting to bottom in this time frame have made their lows. Ideally, I had expected the 7-yr cycle to make its low in September, and the 6-yr in October. Since this reversal has been created by massive short covering as a result of the US Government stepping in to avert a stock market and economic crisis, we should get a pull-back, especially if the 6-year cycle is still ahead of us.
Let's take a look at the technicals:
Chart pattern and momentum:
Sure looks like a climactic pattern, especially since it was accomplished on extremely high volume! But since the sharp 2-day advance of 130 points must have been caused mostly by short-covering, it's very likely that we will retrace a good portion of the initial advance, especially since the 6-year cycle is ideally due to make its low in the next few weeks -- roughly something like what we did after the January low, but not necessarily including a new low, and probably in a shorter time-frame.
Note that the low occurred in the area of three separate confirming projections, and near the bottom of the intermediate-term channel. It was also about a 50% retracement of the bull market move from October 2002 to October 2007. Both the breadth and momentum indicators were very oversold.
Although it looks as if we have seen the low of the decline, all we have done so far is to break out of a short-term down channel. There will be more work ahead to confirm that we have ended the downtrend from 1576 and started a new uptrend. We have rallied into an area of heavy overhead resistance and have already been stopped by the bottom layer which corresponds to the low of March 17.
The next area of resistance begins at the January low and extends to the black internal trend lines directly above, and the red dashed internal trend line above it. Should the index be able to surpass the top black downtrend line, it will still have to deal with the top of the red channel. If the 6-yr cycle low is still ahead of us, we have to assume that one of those trend lines will stop the rally and cause a reversal to the downside.
We've already discussed the 7-year cycle which ostensibly bottomed last Thursday at 1133.5, and the 6-yr cycle which may still be ahead of us.
The next cycle of lesser consequence to bottom is the 20-wk cycle and, according to my calculations, it is due in early October, followed by the 22-wk cycle a couple of weeks later.
I had forecast that a minor cycle would make its low last Thursday, and also had a CIT scheduled for that Thursday Morning. A little after 10:00 AM my time (13:00 ET) Thursday morning, I sent the following update to my subscribers:
From: Andre Gratian
Sent: Thursday, September 18, 2008 10:06 AM
Subject: Market Update
We are now in the perfect time frame for the cycle and CIT lows, we are at the bottom of the channel caused by the red trend line which I drew on the hourly chart, yesterday in the Closing Comment, and I have positive divergence everywhere. We have all the time, price and indicator conditions for a reversal to take place.
The SPX made its low at 13:00, hesitated for exactly 4 minutes, then started up on its 130-point journey. Luck, or good forecasting? I'll let you decide! Probably a little bit of both.
With the resumption of the decline, we should also remember that there is an unfilled projection zone of 1145-1180. If we break below the current SPX low of 1201, it would trigger a confirming overlapping projection of 1130-1155. This was written in the last letter, and was also accurate.
The first projection from the 1134 low was to the 1170's. We paused there for about an hour, then moved on the next projection of about 1208 which was reached just before Thursday's close. Friday's opening took us to the third projection of about 1260-1267 (both by P&F and Fib).
After touching 1260, we corrected 20 points, moved up to 1265, and corrected 27 points before rallying into the close.
If we do not open down on Monday, and surpass 1265, the next potential projection is 1280, which corresponds with the lowest of the black trend lines drawn on the chart.
Since I do not have divergence showing in my hourly indicators, I have to assume that we are going to move higher before a good correction. That would be the typical pattern. But with external forces influencing the markets, I'm ready for anything to happen instead of looking too strictly for patterns that occur in more normal times.
All the excitement of the past few days has done little for the NYSE Summation Index (courtesy of StockCharts). It has only managed to move sideways on Friday. It would be very bullish if it turned up from here with such huge divergence the SPX, but this would require a steady trend of positive A/D figures for the foreseeable future in order to keep the McClellan Oscillator in positive territory.
As you can see on the daily SPX chart above, the A/D MACD has now risen to just above neutral and has encountered the top of a channel. If it breaks out of it, it will initiate a shortterm buy signal, but would then have to continue its upside momentum. If it stalls, it will be in a position to re-test its low before moving higher.
Market Leaders and Sentiment
Short-term sentiment indicators are neutral to slightly bullish. Intermediate-term are bullish.
This is an updated version of the weekly NDX (QQQQ). Two weeks ago, it was threatening to move out of its long-term up-channel (blue). It did, and found support just above a lower support line. On an intermediate basis, it is still performing better than the SPX, but the shortterm relationship has deteriorated and it has begun to under-perform. This will have to improve if we are to develop a lasting uptrend from here.
With the cancellation of short sales on financial stocks, the DJ financial index has broken out of its down-trend channel and given a buy signal which is not yet confirmed by its indicators. This is an artificial situation and perhaps we should not attach too much significance to it, but that's what the chart shows! We'll see how it performs after the ban is lifted in a few weeks.
If we have a clean break out, the index should be able to move up to the target shown by a pink vertical line which is also the area of resistance generated by the black trend line, after which one would expect more consolidation.
There is a good possibility that the 7-year cycle made its low last week and that a reversal marking the end of the intermediate downtrend has taken place. This will have to be confirmed by future market action.
The 6-yr low is probably still ahead of us and would provide the perfect test of the recent lows before resuming the long-term uptrend into 2009 or 2010.
In order to confirm that an uptrend has begun, the SPX will have to rise beyond 1313 and subsequently break out of its intermediate-term trend line which currently lies at 1350.
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