A 3-dimensional approach to technical analysis
Cycles - Structure - 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
A Review of the Past Week
All the signs that pointed to a short term top in the projected SPX 1131/1132 came to fruition this past week with a sudden retracement taking place on Wednesday and continuing for the rest of the week. But the averages are slightly out of synch once again. The Dow topped out 2 weeks ago and has already retraced better than 50% of its up move while, by Friday, the NASDAQ was just barely coming out of its up channel.
Excerpts from the daily comments:
Monday: The "rounding" of the short term top continues as we approach the lower confines of the up channel. There could still be one more bounce before a SELL SIGNAL is given.
Tuesday: The expected bounce has occurred...You may remember that I have been speaking about 1131/1132 as a potential top for several days...IF we cannot exceed 1132 tomorrow, and IF we sell off back to the 1120 level by Friday morning, with poor breadth figures, then I will feel fairly certain that the top is in.
Wednesday Morning: With the 1120 level penetrated on very negative A/D, this is the SELL SIGNAL that we had anticipated. Close: Reasonable projections for the SPX would be a minimum of 1085 and a maximum of 1072. For the QQQ, minimum 33.00 and maximum 32.50.
Current Position of the Market.
Long Term Trend: The long term trend turned up in October 2002 in conjunction with the 12-year cycle. It is still in a BUY/HOLD mode, and is likely to top out at some point in 2005.
Intermediate Trend: A BUY ALERT remains in place for the SPX. The anticipated pull back into October has begun and is expected to last for a couple of weeks. So far, it looks like a normal "test of the lows", but since the retracement has just begun, we'll have to wait and see how it progresses.
The Short Term Trend has topped and is now in a down trend. Because of market volatility, the short term trend is better analyzed on a daily basis. This is done in our daily market updates and closing comments.
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The Short Term Trend is being monitored continually through daily Closing Comments.
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Friday's closing comment read: "The SPX reached and "interim" projection objective at 1108, with the possibility of 1103 as the max for this move which could constitute the first down wave of the correction and from which a rally should ensue. Volatility has been so minimal that it is difficult to distinguish between smaller and larger waves, so the structure remains unclear.
Adding -- and probably causing -- a good part of the lack of clarity is the fact that we are coming into the "window-dressing" portion of the quarter which extends into the end of the month.
Cycles will eventually prevail but, here again, because several cycles are due to make their lows over the next 3 weeks, it is difficult to say exactly during which week the bottom will occur. We'll just have to let the market tell us
Embodied in the past week's daily comments are my expectations for what the market is likely to do for the next two to three weeks.
A Secular Bear Market?
There are always going to be perma-bulls and perma-bears in the stock market. Some investors adopt a mind set which they find difficult to change. This lack of mental flexibility can be dangerous to your wealth! There is a whole segment of investment advisors which are presently saying that we have been and still are in a secular bear market and are looking for the next "crash" to occur! I wonder how they can justify their point of view when looking at the chart which appears below?
I want you to notice the current position of the MACD of those charts, and compare the pattern that it is making with that of the last top. There is no long term weakness showing up, yet. When the current short term correction is over, it is likely that the markets are going to resume their long term up trend and don't be surprised if some, including the DOW, reach new all time highs.
I ask for -- and receive -- a fair amount of comments and inquiries from readers, many of them having to do with my methodology for analyzing the stock market. I welcome these comments and respond to them as promptly and fully as time permits. But many of these questions can be answered fully by visiting my website at www.marketurningpoints.com and clicking on "Philosophy" and "Strategy".
Briefly stated, my approach is based on analyzing cycles, which I believe to be a universal phenomenon affecting investor behavior and therefore market fluctuations. The inter-relationship of cycles of various periodicity causes fractal patterns which are governed by Fibonacci ratios, which is another universal phenomenon.
As a result of this study, one can determine with a fair amount of accuracy the "when" and "how far" components of a market move, something that every technical analyst is striving to do.
The anticipated pull-back which will determine the fate of the intermediate term has begun. Next week is likely to be fraught with end-of-the-quarter window dressing on the part of institutions and it could affect price movement to some degree. We will be in a better position to analyze the corrective pattern after next Thursday.