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 2014. This would imply that lower prices lie ahead. As illustrated by the current market performance, this will not be a straight-down decline, but will consist of a series of intermediate-term rallies and declines until we have reached the low point.
SPX: Intermediate trend. The index made a high at 1150.45 on 1/19 and has been in a downtrend ever since. There is a possibility that this may only be a correction in an uptrend, and not the beginning of an intermediate decline.
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:
After many weeks of frustrating the bears, the market finally reversed when it reached 1150.45. I had projected 1135 for a top, and if surpassed, 1155-60. The high came in the middle.
At this time, it is unclear if the January 19 reversal is only a correction in an uptrend, or if it is the beginning of something larger. The main cause of the decline is the bottoming of the 9-mo cycle which is ideally due next week. There are many signs that it will make its low on time. The kind of a rally that the SPX will be able to muster afterwards will determine if it is only a test of the high, or a rise to new highs.
There is another cycle which is due around March 1st. The 90-day cycle has been very dominant, bottoming in March, July and November of 2009. The current phase should continue to exert some pressure on the market until late February-early March and should be an impediment to a strong rally immediately after the 9- mo has made its low. But afterwards, the two cycles combined should be able to extend the "hope rally", as it is called by some, into about May. After that date, the 4-year cycle should take over and send the market into a more prolonged decline into the Fall.
This is the basic scenario as I see it, and we cannot know, at this time, if mid-January will turn out to be the high of the "hope rally", or if it will come in May or June.
Our immediate focus is on determining the extent of the current downtrend. It is possible that the bottom will not be made until the 90-day cycle has made its low.
What's ahead?
Chart Pattern and Momentum
The Daily Chart of the SPX clearly shows the deceleration which was taking place in the last few weeks of the uptrend. Prices kept rising with less and less upside momentum until a little past the half-way point of the 90-day cycle, and kept hugging the bottom trend line of an uptrend (black trend lines) which started after the July correction, unable to pull away from it decisively. These last few weeks were very frustrating to the bears who kept expecting a decline at anytime. Now that the decline has started, they may be further frustrated by the shortness of its duration.
By closing below 1085, the index has given a projection to 1050-1058. This is marked on the chart by the two lower pink lines, and there is at least a chance that it might not make it even to that level before it bounces. The two bottom indicators started to flatten out 5 trading days ago, and the A/D indicator is now showing some positive divergence. In this position, it does not take much to turn them up and give a buy signal. However, because of the 90-day cycle bottoming at the end of February, we could have a bounce followed by another decline into the target later.
Considering the position of most indicators, the market should make a low in the next 2 or 3 days.
The green channel lines represent the trend from last March. This decline will not become an intermediate downtrend until it has broken out of that channel and started to trade below the last short-term low of 1029.38.
We will now move to the Hourly Chart to evaluate when the 9-mo cycle might make its low.
I like to draw channels by connecting the appropriate lows and then drawing a parallel from the top. This technique seems to give a good representation of the trend the majority of the time. In this case, the decline which started when the index broke below its trend line from July, is framed by the two heavy black lines which form a down-channel. The index should continue to trade within the confine of these lines until the trend has reversed. The first indication of a reversal will come when the red trend line is penetrated on the upside. It will become confirmed when prices move out of the channel and above the last price cluster (about 1103).
There is already plenty of positive divergence in the indicators, which normally means that the reversal is imminent. The nearest projection of 1069 could indicate an interim low within the downtrend, unless enough strength develops to move through the trend and channel lines, in which case it would become the low of the decline. The main projection, however, is between 1050-58, and the small cycle bottoming on 2/3 in conjunction with a CIT occurring on the same date could mark the low of the 9-mo cycle.
Cycles
The 9-mo cycle is mainly responsible for the current decline. Ideally, it should bottom in the next few days. It will be followed by the 90-day cycle which has been very dominant and is scheduled to make its low towards the end of February.
Longer-term, the 4-year cycle should exert pressure in the second half of the year.
Projections:
There is an interim projection to 1069.
By breaking below 1085, the SPX has given a projection to 1050-1058.
We should also keep in mind that .382 retracement of the move from July to the top is 1043.
Breadth
This was the comment made in the last newsletter:
"The NYSE Summation index (courtesy of StockCharts) has now reached overbought on its RSI. The rally in the SPX to its projection target has caused it to become overbought with severe negative divergence -- just what we need for a top. We now need for it to turn down for a sell signal."
This is what the index now looks like. It is now just entering the oversold status and does not look quite ready to turn up -- which means that we might have more declining prices ahead of us before we find a low.
The short-term A/D is beginning to show a pattern of deceleration and divergence to price, which is an indication that an interim low may be just ahead of us.
Market Leaders and Sentiment
Also from the last newsletter: "The long-term sentiment indicator (courtesy of SentimenTrader, above) is now in a position to give us at least a short-term top."
Currently, the indicator is showing the exact opposite of what it did two weeks ago: it is bullish and suggests that a low is imminent.
We should also note that the banking index has hardly participated in the decline.
Summary
This was the comment made in the last newsletter:
"The SPX is now ready to have a short-term decline which could be the start of something bigger. To suggest that we have started a move of intermediate nature, we would have to trade below 1030. More topping action may be needed before we are ready to do this."
I think that I will let it go at that.
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