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
After showing consistent positive divergence to price action for a couple of months, the NYSE Advance/Decline line reached an all-time high this week. Perhaps this has some longer term significance, but it is of no help to the short term with price weakness completing its 4th week and spreading to all indexes.
In my last letter I mentioned that a number of short term cycles were expected to make their lows in this time period. Two of them already have, but the most dominant one, the short term trading cycle is still coming down and will probably bottom next week.
The 1095-1100 SPX level which had been mentioned as a potential target zone marked the end of a down phase. The second phase which is currently under way has a price target of about 1080 with a maximum of 1070-1075. Price projections are determined by analyzing a Point and Figure chart and measuring the amount of distribution which takes place at the previous top or the accumulation which takes place at the low. In this case, the top pattern had two distinct phases, with the first one calling for a decline to the first target zone. Adding the second phase gives us the second maximum projection. However, since the second phase is a "weaker count" than the first, it is possible that prices could stabilize before reaching it.
The market action on Tuesday triggered a "marginal preliminary buy signal". A similar signal in reverse was given at the last short-term top.. The first preliminary sell signal was not confirmed until a few days later and after prices had moved slightly higher. I suspect that we are pretty much in the same reverse technical position right now.
Current Position of the Market
SPX - sell. A confirmed sell was given on 3/10/04. A bullish warning was given on 5/17 but could not progress to a buy signal. The intermediate trend has now reverted to a sell signal.
Short term trend:
SPX - A confirmed sell was given on 7/01. On 7/20 a "marginal" preliminary buy signal was triggered.
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Short term, there is increasing evidence that the short term decline is approaching a reversal point. Divergences in the hourly indicators are now more pronounced, the bottom of the last one of the short term cycles nesting in this area is near, and a reliable price target is also near. Also important, prices are approaching the .618 speed resistance line drawn from the October 2002 lows to the March 2004 top. This trend line, which generally defines the intermediate term trend, will be at 1082 by the middle of the week and prices should find some support in this general area.
Conditions are favorable for a tradable short term rally to begin soon. The SPX 1120 level may be problematic and could stop the advance. But we'll have to wait until the bottom is in to make reliable projections.
The intermediate term trend has grown weaker, and it is now clear that what could have been an A-B-C consolidation is evolving into a more complex corrective pattern. This is not surprising since I have been discussing the growing influence of the 10-year cycle going into the Fall, and it was simply a matter of time before it was felt. When the last short term rally failed to overcome the previous top, it was a sign that market strength was ebbing.
GE and the Dow Transports continue to outperform the market, but look ready to consolidate their recent gains. The QQQ has grown weaker than the SPX, but should stabilize in the 33.50 to 34 area.
How much weakness can we expect ahead? I believe that the current cyclic map calls for a moderate intermediate term correction, possibly into October. A 50% retracement of the move from March 2003 would bring prices down to 980. Counting from October 2002 brings us to 967. So the 965 to 980 level looks like a reasonable Fibonacci objective for the correction.
We are only challenging the .618 SRL at this time. The .382, which generally defines the long term trend is a long ways down and not yet within reach. Perhaps it will be challenged in 2006, as the next 4 year cycle enters its strong down phase. The chart of the SPX which appears below illustrates the position of the two SRL lines.
SUMMARY: Based on a number of factors detailed above, a short-term rally appears imminent. However, it is likely to fail before reaching the former highs. The momentum indicators for the intermediate term trend weakened noticeably this past week, but are neither oversold nor showing positive divergence. This indicates a strong probability that the down trend will continue after the short term rally has exhausted itself. Projections for the extent of the short term rally will be given after the low is in.
GOLD IN TROUBLE!
I am including a weekly chart of the dollar and of gold. By looking at the oscillators on both charts, it is easy to see that the dollar appears to have just started an important intermediate, if not long term, up trend while gold looks as if it is about to break a long term up trend line.