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 - Down! The very-long-term cycles have taken over and if they make their lows when expected, the bear market which started in October 2007 should continue until 2012-2014. This would imply that much lower prices lie ahead.

SPX: Intermediate trend - We are testing the former lows. They look as if they are going to hold, but ...!

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 discusses the course of longer market trends.

Overview:

The market is in the process of testing its 11/21/08 lows. They may hold, or be broken by a slight margin. But technical indicators are suggesting that this low will be of intermediate degree, bringing about the best rally of the bear market to-date.

The financial index is still the weakest, breaking below its November low by a small margin last week, while both the Russell 2000 and the Nasdaq 100 are the strongest and beginning to resist the downtrend better than the rest of the pack. This will be one of the signs that we are approaching a good low, if it persists. Perhaps it means nothing because, seasonally, the small caps outperform the large caps in January. Both the Dow Industrials and the S&P 100 (large caps) are the next weakest indices. Except for the financial index, the differences in performance are not that great, but clearly visible when the charts of major indices are compared to one another.

Unless you are extremely good or extremely lucky at picking the right stocks, the strategy of buy and hold is not likely to work for you in this market atmosphere. We are in a secular bear market which still has a long ways to go before completion. In a bear market, the great majority of stocks lose value. Intermediate traders will have a chance to buy and sell the intermediate swings (providing they are able to identify them correctly), but this is, and will continue to be mostly a trader's market. Volatility is not as high as it was in the last quarter of 2008, but there is still enough of it to ensure the astute short-term trader some good returns.

What's ahead?

Chart Pattern and Momentum

The black line at the top is the long-term trend line. The blue lines represent the channel which will probably contain prices for some time. We might call it the semi-long-term channel. Prices also formed an orange channel which was recently broken. During this decline, the index has continued to trade above it, finding support on the outside channel line.

I have labeled what I consider to be the best Elliott Wave interpretation, although there are several others that could turn out to be valid. Under the current labeling, the SPX is now approaching the end of wave 5 of intermediate wave 3. When it is complete, intermediate wave 4 should give us a good rally.

The indicators seem to agree that we are coming into a low, but we are not quite there, yet. In order to make a normal basing pattern there should be at least one more retracement . As we will see later, with the hourly momentum index solidly overbought, the odds strongly favor one more wave down. If it is only a small wave, there is a good chance that wave 5 of intermediate 3 will turn out to be truncated.

The hourly chart shows that the steep and persistent decline from the 943.85 top is losing more and more momentum. From the 15th of the month, the indicators started to head back up, and now the momentum index (middle) is overbought while the A/D (bottom) is showing negative divergence for the first time since it turned up. That's a sign that we should probably expect one more decline to a lower low before we can reverse the trend.

If the entire retracement is wave 5 of intermediate wave 3, as suggested on the daily chart, this last small decline does not look capable of going beyond 741 to make a new low for the longer trend. It may again find support on the top of the orange channel line, as it did previously. It could also find support at the bottom of the blue channel, but my guess is that it will go slightly beyond before reversing. If we go much lower than the orange dashed line, the Elliott count will probably be incorrect. EW analysts view the lower congestion pattern as a triangle wave 4 from 943, needing a wave 5 to make the entire intermediate wave 3 complete. Considering the position of the indicators, it sounds reasonable as long as we do not get too much more weakness over the next few days.

Cycles

The cycle which is driving prices lower at this time is probably the 18-mo Hurst cycle. Mid-February will be 18 months from the 4.5-year cycle low which occurred on August 16, 2007. If we are as near to an intermediate reversal as the former analysis suggests, mid-February is very far away to wait for the trend to reverse. If the EW analysis is correct, the cycle will bottom early, perhaps as early as next week.

Friday was the bottoming of the 5-week cycle. It picked up the index just in time to prevent a new low from being made and to frustrate the bears. But the rally which it engendered was sluggish, particularly in the A/D. This accounts for the beginning of negative divergence showing in the indicator.

With the 7-year and 6-year cycles bottoming last Fall and providing support, it would make sense to see a test of the November low and not to create a new one. But these are only suppositions. The market will tell us next week what it intends to do.

Projections:

The projection which concerns us the most right now, is what will be the final low of intermediate wave 3. Assuming that we are in wave 5, it should conclude at about 785. If prices drop much below that, we will have to assume that our interpretation is incorrect and that we may be on our way to new lows. Should weakness resume in earnest and 741 be broken, the target would be about 650.

Breadth

The substantial improvement in the McClellan Summation Index (courtesy of StockCharts) is undeniable, but it also presents a dilemma. It is very overbought short-term, and has just barely started to correct. Can the market be at an intermediate low with this indicator in this position? I don't know!

The short-term A/D indicator, however, is close to being oversold, and the hourly appears ready to give a sell signal. We'll have to see how the market resolves this situation over the next few days.

Market Leaders and Sentiment

There is no contradiction here. Longer term, sentiment (courtesy of Sentimentrader) has gotten much more positive and does support the idea of an important low coming up. It is not as super-bullish as it was at the November lows, so there is some room for more improvement, which means that the market is not yet immune from continuing its decline.

Summary

There are many signs that the SPX and other indices are very close to a low of an intermediate nature. If the proposed Elliott Wave count is correct, we are nearing the end of intermediate wave 3. However, it very much depends on the near term action of the market for confirmation. Only mild weakness should take place over the next few days.

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