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Turning Points

"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

A Review of the Past Week:

The stock market continues to be frustrating to both the bulls and the bears, as it is unable to make any substantial headway in either direction.

On 6/8, the market had a brief pull-back and a brief consolidation before attempting to go through the overhead resistance. This was not enough charge to provide the necessary thrust for the job, and so we fell back once again, assisted by a Fibonacci sequence point which was instrumental in causing the reversal. By Thursday the S&P had retraced to 1110, the level that last week we had projected as a likely target, and the selling completely dried up! Holding at these levels would be bullish, but a further short term decline to 1100 would not be surprising and might even be preferable.

There are good reasons why the market failed to go through the tops. Last week we showed a graph of the NYSE A/D. This week, we show you the total A/D and New Highs/New Lows index.

This points to the dichotomy between the various averages. The NASDAQ, especially, needs to regain its footing if we are to overcome the previous highs. The New Highs/New Lows have held up well for all the markets.

Two other charts of interest appear below:

Both of these industry groups are important gauges of market mood. The SOX influences the performance of the NASDAQ, while the XBD influences the performance of the NYSE. Considering the recent weakness that has permeated both of these indexes, it is remarkable that the general market has held up so well. But, as all things must come to an end, which will give first? Please note that both of the above show very oversold stochastics, and a positive divergence developing in the MACD. This indicates that most of their weakness may be behind and that they may be ready for a rally which would help the overall markets.

The Basic Market Action: The stock market progresses through a series of accumulation and distribution phases which generate the next move. The basic pattern is: accumulation - up trend, distribution - down trend! These accumulation and distribution areas are best seen on a Point and Figure chart. They also carry a built-in projection of how far the move will extend after the break out has occurred.

The degree of accumulation which took place between 5/12 and 5/25 suggests that the SPX could move up to at least 1165, and perhaps to as high as 1215. This is one of our reasons for expecting higher highs to occur before the current trend is reversed. It is remarkable how often these projections bear out. However, they only indicate a potential, not an absolute, and therefore must be confirmed with subsequent market action.

Summary: So far, market action continues to support the view that the recent highs will be exceeded before a deeper correction sets in, but we are nearing the moment of truth. We must do this quickly, or the window of opportunity will close and what appears to be an ABC consolidation will undergo a metamorphosis and become a "running 3" or some other type of corrective process which will extend the consolidation for many more weeks.

Current Position of the Market

Intermediate term trend:

SPX Bullish warning. A confirmed sell was given on 3/10/04 The bullish warning was given on 5/17. So far, we have failed to give a preliminary buy signal. The SPX would have to close above 1150 to give a confirmed buy.

Short term trend:

SPX Bullish warning. A confirmed sell was given on 7/01. A bullish warning was given on 7/08.

(See below for an explanation of this forecasting system.)

Market Position Labeling System

Many forces act upon millions of investors and cause them to make individual buying and selling decisions. The stock market is the distilled product of this group behavior. While it is helpful to analyze some of these forces separately (E.G. Cycles) price and time produce the final picture in the form of patterns and trends.

This system was devised to provide a better perspective of current and future market trends by identifying the short term (roughly 2 to 6 weeks) and the intermediate term (6 to 9 months) with a 3-phase labeling system that will be applied specifically to the SPX.

#1 - Warning: A warning that the current trend is running out of momentum and may be turning. Occasionally, as in the case of a climactic move, there may be little or no warning.

#2 - Preliminary buy or sell: Strong but unconfirmed evidence that the trend has turned.

#3 - Confirmed buy or sell: The trend has turned and a new trend is under way.

Once a confirmed buy or sell is given, there is a strong probability that the new trend will continue for some time in the same direction.

The 10-year cycle: From a cyclic point of view, although it is not one of the most dominant long term cycles, the 10-year cycle is the most important influence on the market this year. But it presents us with some unknowns:

a) Is it responsible for currently exerting downward pressure on the market and neutralizing the upward push of other cycles? It would seem so, and it may have been doing this from the beginning of the year.

b) When will it finally make its low? The low of cycles of that magnitude can vary from one span to the next by several months. It is best to let the market tell us when this has taken place.

c) And finally, how much (more) weakness will it bring? Perhaps not all that much because it is being countermanded by the 12-year cycle which is still early in its up phase. However, we can be fairly certain that it is unlikely to bring about a "crash" in the market, but rather, at worst, continued moderate corrective action.

We are preparing a more detailed explanation of our labeling system, including graphs, which show how we arrive at these buy and sell signals. If you would like to be emailed a copy of this explanation when it is ready, please let us know at andre@marketurningpoints.com.

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