The positive divergences which were evident in the hourly indicators last Friday resulted in the anticipated very short-term rally. From a cyclical standpoint, last Friday probably also marked the low point of the short term trading cycle, the most dominant short term cycle, which has been running an unusually regular 31 to 34 trading days for its past 5 periods.
This cycle failed after a brief 2 day rally. The same thing happened at its last low, on 3/16, and the market went lower to reverse 6 days later. That reversal was then caused by the bottoming of the 9-month cycle. Since we are still looking for a potential low point (emphasis on potential) caused by the 60-week cycle, it will be interesting to see if the pattern repeats itself this coming week.
Last Friday was a very strange day, technically. The NYSE new highs/new lows index had a net differential of -686.
This negative number has only been exceeded twice in the past 3 years. Once at, or near the 9/17/01 low, and the second time at, or near the 7/22/02 low, both of which occurred after a significant and protracted downtrend and marked the lows of important cycles. These were the signs of a selling climax, not the beginning of a decline.
The NYSE advance/decline differential also behaved in a manner more consistent with a selling climax by totaling a little over 5000 net declines in just two days. The NASDAQ H/L, by contrast, only had a net -68 and a two day total of about -900 A/D differential.
The price action of the SPX and DOW, although weak, did not reflect the negative breath numbers mentioned above, and the price action of the QQQ, showed a positive divergence to the SPX and DOW. Another key indicator, GE, is beginning to show positive divergence from the averages.
What does it all mean? I am not sure! The simple explanation is that the horrendous breath readings of Friday which occurred in conjunction with the breaking of a trend line, gives us a strong sell signal. But there are pieces missing! The price pattern of the major averages are still more reflective of an intermediate-term correction of an overbought condition rather than a major top. The weekly momentum indicators normally show negative divergence at major tops. This has not yet happened.
For the shorter term, the daily stochastics are very near an oversold condition while the MACD, although not yet ready to turn up, seems to be working itself into a positive divergence position. Also, the McClellan oscillator is at a very deep oversold level, which normally means that at least a short term rally is imminent.
The hourly indicators are showing a mixture of oversold, neutral, and positive divergence readings which also suggests that a rally may be near.
STRUCTURE: Without getting too deeply in Elliott Wave analysis, the overall corrective pattern, so far, looks like an ABC correction which is not yet quite complete. An acceleration of the price decline would probably nullify this interpretation.
FIBONACCI: Since the Dow made its long term top on 1/14/00, most of its intermediate tops and bottoms on the weekly chart have either coincided exactly with a number of the Fibonacci sequence, or been off by one week. Since the 12-yr cycle low of October 2003 was 143 weeks from the top, the next number in the sequence ( 233 weeks from the top) will occur in the last week of June. This COULD be a low which will mark the end of this consolidation/correction. OR, the top of a final rally which will be followed by a decline into the 10-year cycle low.
How Important is the 10-Year Cycle?
The 10-year cycle is the most important cycle likely to affect the stock market in the next few months. By taking a look at its historical record, we can derive insight into what effect it is likely to have on stock prices in the near future.
Historically, the punching power of the 10-year cycle is uneven. It appears that it has never, on its own, caused a severe decline in the market, but only in conjunction with other important cycles, and in 1964 it only contributed to the slowing of a very strong up trend. Perhaps this is because the market had reacted sharply into a 4-year cycle low just two years before. Since we have essentially the same situation today, with a combined 12/4-year cycle low having occurred two years ago, it is possible that the 10-year cycle will be of little consequence
SUMMARY: There appears to be a disconnect between current NYSE breath figures and price action in the market averages. It has been suggested that because of the recent increase in bond ETF's traded on the NYSE, breath figures are no longer as representative of overall equity action as they once were. This appears to be the case, and the current concern for a prospective rise in interest rates has caused a sudden and massive liquidation of interest rate related securities which is making market action appear more negative than it actually is. Consequently, it might be best, for the moment, to give more weight to the action of the NASDAQ and to price momentum indicators, and less to the NYSE breath figures. As they currently stand, the hourly and daily price momentum indicators suggest that we are probably much closer to a low than to the beginning of a decline. But all indicators are only precursors of future market action. The final verdict is rendered when a trend line is penetrated. There are now well defined short term down trend lines and price channels representing the current trend of the market. They will have to be penetrated to the upside to signify that this correction is over.
GOLD: The commercial traders have covered even more of their short positions, which means that they are expecting the decline to come to an end very shortly. Also, the XAU is nearing a Point & Figure target. And finally, the dollar is making another run at its 92/93 short-term target and appears to be completing a 5-wave pattern.. A good rally in gold cannot be far away.