For the past few weeks, waiting for something to happen in this market has been a little bit like "Waiting for Godot!" Maybe tomorrow! Well, tomorrow may just about be here.
The short term trading cycle of which we spoke in the last newsletter apparently made its low on Tuesday without much fanfare, and has pushed prices up steadily since then. Slightly new highs have been registered by the Dow, the SPX and the QQQ, as well as by GE and the Dow Transports, which are now trading at a new recovery high.
While this is not yet a confirmation that the intermediate and long term up trend have resumed, it appears that it could be on the verge of happening. Even the short term sell signal which took place on 6/8 could not make any headway on the downside and now the point from which that signal was initiated has been surpassed.
This is BULLISH behavior! And there are other signs, as you will see when we dissect the market:
Cycles: If my assessment of market cycles is correct, the 12-year, the 9-month, the 60-week and the short term trading cycles are all trending up. The 10-year cycle is trending down and should be making its low in the Fall, unless, as we mentioned last week, it is doing so now, ahead of schedule!
Structure: The best possibility is still that we have just concluded an A-B-C pattern representing wave 4 since March 03, and that we have begun wave 5.
Breadth: The advance/decline ratio continues to give positive readings, while the new highs/new lows index continues to make recovery highs.
Leading indicators: As mentioned above, these are all doing well, and are enticing the stock market to follow their lead.
Volume: Although it picked up slightly for a couple of days after the short term cycle made its low, it has remained essentially dull, which is typical of a market where investors do not want to make a commitment until they have a little more proof. Last week we warned you of what NOT to do when volume is low!
Fibonacci: Next week will be the 89th week since the October 2002 low. Will this signal a market top? Or is it just much-ado? Next week will tell us.
Momentum: We've saved this for last, because this is the only area where there is a bit of a caveat! Daily indicators are basically neutral and could go either way, while the hourly indicators are overbought. In an of itself, this means nothing, since these can change on a dime depending on the price action. But it COULD be an indication that all is not absolutely perfect, just yet.
Summary: The market is at a critical juncture. If it breaks through to the up side, a substantial move can take place immediately, as all the cash which has been accumulating on the side lines is put to work. If it fails to do so quickly, it could mean that more correction is needed, perhaps all the way into the Fall. Technical evidence suggests that the former is more likely than the latter.
There were strange things going on in the last hour, on Friday, with the SPX and GE selling off, while the QQQ closed near its highs of the day and of the week. Also, the daily volume shot up to 1.8 billion shares. No doubt, this is due principally to the restructuring of the Russel 2000 and anxiety about what this week-end could bring in Iraq. Next week will tell us more.
Market Trends: A fact that impatient investors do not appear to realize is that trends take their time to reverse, either up or down, and they undergo a preparation process before doing so which gives warning signs in the form of loss of momentum, for instance, as well as other time-proven indications. Short term trends, by their very nature, are always in the process of reversing as they compose the longer term trend. This is the fractal aspect of the market. Since it is easy to confuse short term weakness for long term weakness, one should look at how all the trends of various periodicity "hook-up" together. The longer term trend is always the most important to analyze. A weekly chart, such as the one of the SPX which appears below can tell you at a glance whether the long term trend is up, down, or about to reverse. Add a couple of important cycles to your analysis, and you have a better picture still.
On the chart below, note how little relative retracement there has been in the consolidation since the January 2004 top. For two important cycles such as the 9-month and the 60-week cycles to bring in so little weakness in the market as they bottom out, this must signify that the long term trend--which began in October 2002 as the result of the 12-year cycle low and was reinforced in March 2003 by the bottoming of the 120-week cycle--is still strong. Even with the 10-year cycle so close to its low, the market is holding up extremely well. Negative signs will have to show up before one can get too bearish.
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