The stock market continues to behave as anticipated. The short term top which occurred on 6/8 has, so far, brought very little weakness but more of a sideways pattern. What appears to be taking place is that the upward pressure of the intermediate cycle is being offset by the shorter term cycle which is still in the process of making its low.
The "short term trading cycle" (AKA 27-day cycle) is one of the most dominant cycles in the market, but it can vary in its periodicity from approximately 25 to 35 trading days. Price action suggests that it may not yet have made its low, but is likely to do so next week. This would coincide with an important number in the Fibonacci sequence--the 89th week from the 4-year/12-year cycle bottoms of October 2002--and create the ideal condition to begin a rally to new highs.
It does not HAVE to happen this way, but this is the most probable scenario. Technical analysis is largely making a series of educated guesses that are based on reliable observations of past market behavior. Occasionally the guesses prove to be incorrect, and it is then the function of the analyst to adjust rapidly to the unforeseen developments.
DISSECTING THE MARKET:
Momentum: On the chart of the QQQ which appears above, please note that neither the MACD nor the stochastics have given much ground. This suggests that a little more consolidation/correction could take place.
Structure: The chart shows a clear 5 wave pattern in the short term up trend which just ended . This could be the first wave of a new up trend with wave 2 under way. If this is correct, we can anticipate a strong advance after this wave is complete.
Breadth indicators: Overall, the advance/decline ratio remains positive and on Friday, the NYSE new highs/new lows index had its most positive reading since its selling climax of six weeks ago.
Leading indicators: GE and the Dow Transports made new short-term recovery highs this week, with the Transports already challenging their 1/20 highs. These are positives. The QQQ is slightly weaker than the SPX, indicating that a little more correction probably lies ahead.
Volume: The volume has remained extremely light. It picked up on Friday, but this was more a function of expiring options than renewed interest. Old-time stock market traders had (collectively) achieved some degree of market wisdom which should not be ignored: One adage was "Never sell a dull market"!
Fibonacci: From 1/20 to 5/12, the S&P500 corrected .232 of its move from March 03. A normal Fibonacci retracement for an up move is .486 (50%), less common is .382, and rarest of all, .236. If the correction is over, this indicates that we are still in a strong up trend.
Cycles: The 9-month cycle made its low on 3/22, and the 60-week cycle apparently made its low on 6/12. These are important intermediate term cycles which normally generate a strong rally. Why has this not yet happened? It is possible that this is because the 10-year cycle which is expected to bottom this Fall is exerting downward price pressure as a counteracting force.
But here is another theory which is only a theory at this time: What if the 10-year cycle is in the process of making its low, now? Only the bottoming action of a long-term cycle could possibly generate the bullish readings mentioned below under "SUMMARY".
The corrective pattern which began on 1/20/04 was probably completed on 3/22 for the QQQ, GE, and the Dow Transportation Index, and on 5/12 for the SPX and Dow Industrials. There is nothing to suggest that recent action is anything more than an A-B-C correction preceding another phase in the up trend which began in March 2003.
The stock market always behaves in a logical manner and normally gives the trained analyst plenty of warning about its next important move. There is, as yet, no sign in today's market behavior that suggests that it is about to "crash" imminently. In fact, the following chart of the Specialist Short Sales which are at their lowest level since 1988, adds significantly to the bullish readings of the NYSE members buying which is at an all time high, the recent record positive reading of the McClellan oscillator, and the extremely bullish Put/Call ratio. These are not the indications you get at a market top! Have market conditions changed so much that one can afford to disregard these combined super-bullish indicators?
4 Week Average of Specialist Short Sales / Total
Short Sales (Ratio) with S&P Overlay (green)
GOLD: I have mentioned on a number of occasions that the most important indicator for gold is the short position of the commercial traders. They have been letter-perfect for a very long time.
In his recent book The Right Stock at the Right Time: Prospering in the Coming Good Years, the well-known stock market "guru" Larry Williams states: "If the gold bug camp would pay attention to what the commercials are doing, they, themselves, would have a much better idea of when to get in an out of this market."
The current short position of the commercial traders is at a multi-month low, which means that they are either anticipating a sizeable rally in the gold market, or that there is little risk of further downside action in gold at this time. We need not speculate about their motives, let's just see what happens to the price of gold in the next few weeks.
The XAU is still in a long term up trend, but does not look quite ready technically to start another significant rise.