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 - The index may have started a counter-trend rally which has the potential of extending itself in a bumpy ride for several more weeks if it can overcome the resistance which lies directly overhead.
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.
Since reaching its 667 projection a couple of weeks ago, the SPX has had a solid rally of 136 points which was reason enough to have a correction. It also met with resistance from a previous low and from an internal trend line (as you will see on the daily chart later), and it is now undergoing a correction.
This rally does not appear to be the anticipated minute wave 4 which was to be followed by a minute 5 and completion of several waves of a higher degree, including intermediate wave 3 or 5. It appears, instead, that the completion of the decline from 943 came at 667, and that we have started a more substantial up-move. There is little consensus among Elliott Wave analysts for the intermediate term count currently, so it is best to put that aside for now, and give the patterns a chance to clarify themselves, but the short-term trend could be read as an impulsive 5-wave pattern.
Next week will shed more light on what it is we have started. The Dow industrials was stopped by a 6-mo downtrend line drawn on its weekly chart, but the financial index and the banking index went through theirs by a substantial margin, which is a positive. I am charting the SPX slightly differently and it will have to go through 803 to overcome its immediate resistance.
There are some very competent technical and cycle analysts who believe that we have started a rally of several weeks, if not months. My intuition tells me that they are probably correct, and I find some of that evidence in the weekly charts of all of the equity indices as well as in some of the longer term technical indicators. I will post the chart of the Dow Jones Industrials later.
One date to keep in mind is April 23, which is the next occurrence of the Armstrong Cycle. In the past, this cycle has had good correlation with important highs and lows in the market but, like everything else, it has not been 100% accurate or significantly impactful. Let's dissect some of the technical components to see if we can get some clues of ...
Chart Pattern and Momentum
We'll start by analyzing the chart of the weekly DJIA, which has been one of the weakest equity indices. There are 3 channels drawn on the chart, the green one being the steepest. Since its 9000 high in early January, the index has steadily traded in the upper part of its channel. This is a sign of deceleration, and it is supported by the positive divergence which has developed in the indicators.
After declining to 6817, a point of support where trend lines from the three channels meet, the index started a rally which came to an end last Wednesday at 7571, where it was stopped by the top of the channel line for the third time. If it should go through it after some consolidation it would be bullish and suggest a continuation of the rally for several more weeks.
Bullishness is also reflected in the volume, which has expanded during the rallying phase. This could be misleading because there was heavy down volume for the past two days while the index started to correct; but that was at the end of an options expiration week. We'll get more information as the correction continues.
If it does go through the top green channel line, it would be in a position of breaking out of the bottom half of the black channel and challenging the black trend line-- assuming that it can overcome the center dashed line which has also stopped 3 attempts before.
The current position of the index makes the analysis of the intermediate trend rather easy. In order to expand on its current short-term bullishness and confirm an intermediate low, the DJIA must 1) continue a mild correction without giving too much ground and with volume dropping off significantly, and 2) turn up and go through the trend line on expanding volume and strongly positive breadth, as the indicators continue to rise at a steeper and steeper angle. If it does the opposite, we know that we are still in a declining market and will probably complete that missing small 5th wave.
Let's now look at the daily SPX. I could not quite match the three channels, but that should not impede our analysis.
At 667, the SPX found support on a parallel to its black channel and started to rally. It found resistance at the 50 DMA at a higher parallel of the black channel lines as well as at the bottom which occurred on 1/21. The indicators showed positive divergence and went to overbought, but are not making a topping pattern. They are now correcting.
Here, also, the extension of the rally will depend on a fairly mild and brief correction, and the ability of the index to overcome the trend line on the next attempt. Note that there is another one just above it which could also provide resistance.
The green asterisk on 4/1 is the date when the 6-wk cycle should make its next low. We may have to wait until it has bottomed to complete the correction.
We now turn to the hourly chart to gauge the readiness of the SPX to resume its uptrend. The black trend lines delineate the portion of the black channel shown on the daily chart which is currently affecting the index.
The top trend line offered resistance, as well as the dashed red line which is drawn at the 1/21 low of 804.30 which starts a congestion zone extending to 878. It would be a very bullish accomplishment if the SPX were able to move beyond this congestion area.
The index reached the top channel line at a time when the daily indicators were overbought and the hourly indicators were showing negative divergence. This stopped the rally and prices began a decline, broke their uptrend line and moved out of their channel.
At Friday's close, the indicators were still declining, but the middle indicator, which is the overbought/oversold index, is already oversold. They will signal the end of the correction when they turn up decisively.
A strong buy signal in the hourly indicators should coincide with a buy signal in the weekly indicators.
The 20-wk cycle should have made its low around early March and was partly responsible for the rally.
The 6-wk is due to bottom on 4/1.
The 22-wk cycle is due in the second week of April.
The next Armstrong cycle date is April 23.
If the inability of the SPX to reach its 636 projection and stop at 667 instead, has to be considered a sign of strength.
If the rally from 667 is a 5-wave impulse -- which it appears to be -- and the 4th wave retraced to 750, a pullback from the top of wave 5 to the bottom of 4 would be a normal correction. It would also constitute a .382 retracement.
If the 750 level is broken, it would trigger a projection to about 722 which would also be a 50% retracement.
If the rally resumes and makes a new high, we will have to wait until we know the exact low of the pull-back before we can project a short-term upside target. If this proves to be an intermediate move, the SPX could eventually reach 980.
The intermediate view of breadth is bullish, as represented by the NYSE Summation Index (shown below courtesy of StockCharts) and the new highs/new lows, which have both remained well above their November '07 lows while the market was making new lows.
The NYSI is back in an uptrend after making a higher high in September '07 and a higher low in March '08.
The daily breadth indicator is correcting after reaching an overbought condition, and the hourly has been correcting and is now approaching an oversold condition.
Market Leaders and Sentiment
The sentiment indicator (courtesy of Sentimentrader) remains in the green for the longer term, which supports a bullish condition for the market, while being in the red short term, which supports the current correction and suggests that it may have a little longer to go.
The NDX has been showing relative strength to the SPX and continues to do so. It is one of the few indices which did not break its 2002 lows, but has remained above it by a good margin. It also displayed more recent relative strength by remaining above its November '07 low, and the rally puts it much closer to its early February high than other indices.
Finally, both the financial index and banking index have broken out of their 6-mo intermediate trend line from last September, while the SPX has barely nicked it, and the DJIA was pushed back by its own trend line last week.
There are signs that SPX 667 could have been the intermediate low that we have been waiting for, and that the rally which started at that level could be the beginning of a larger move.
Confirmation would require a mild consolidation of the current advance, followed by another strong advance.
The following are examples of recent unsolicited subscriber comments:
Awesome calls on the market lately. Thank you. D M
Your daily updates have taken my trading to the next level. D
... your service has been invaluable! It's like having a good technical analyst helping me in my trading. SH
I appreciate your spot on work more than you know! M
See if you agree by subscribing to a FREE 4-week trial. Send an email to: Ajg@cybertrails.com.