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
What a chaotic week this was! At the beginning of the week, the Dow Industrials reeled as a result of the Merck announcement and by the end of the week rallied strongly while the Dow Transportation and oil futures made new highs. The SPX is close behind challenging its recent highs and the NASDAQ is coming on strong! The volume increased measurably and we had super strong numbers in the new highs/new lows index all week, but the McClellan oscillator is beginning to show negative divergence.Can we make any sense of all this and put it all in a coherent perspective?
I had mentioned previously that I was expecting several important cycles to bottom over a 3-week period ending somewhere around the middle of October. The most important one, the 2-year cycle, would ideally have made its low about October 10th in conjunction with a couple of shorter term cycles, including the short term trading cycle. There was another important intermediate cycle making its low this past week, but it was not expected to bring about this kind of strength. So it is very likely that the 2-year cycle bottomed early and combined with the intermediate cycle to form a powerful low.
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: The BUY ALERT will be upgraded to a BUY SIGNAL if there is a strong follow through on Monday.
The Short Term Trend is up with some potential higher projections discussed below. 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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There are strong positives that cannot be ignored. I will list them below:
1. The New Highs/New Lows index is making a very powerful statement with by far its best performance since the March highs.
2. The volume over the last few sessions has increased significantly in confirmation of the rise in prices.
3. The advance/decline ratio has turned up again with strong numbers after a brief dip into the negative.
4. The Transportation Index continues to move to new highs, leading other averages which are beginning to follow. The New York Stock Exchange Composite Index and the Russell 2000 are beginning to follow its lead and have broken out of their intermediate downtrend channel. The SPX may not be too far behind.
5. The action of the Dow Industrials, followed by a strong recovery, is typical of a selling climax which marks the low of an important cycle and occurs prior to a strong up move. This suggests that the cycles which I had expected to bottom in this time frame have probably made their lows and are now adding their strength to the longer term cycles which have contained the intermediate term correction and which are still strongly in their up phase.
All this suggests that the intermediate term trend correction is over and that we are now ready to push to new highs in the averages.
Are there any negatives? The various averages are in different technical positions from the strongest which is the Dow Transports to the weakest which are the Dow Industrials, OEX and Nasdaq. I have recently used the term "out-of-synch" in reference to the various averages. Actually, this is incorrect. A more correct assessment is that some are leading and some are following, and they all appear to be trying to get back in a long term up trend.
The McClellan oscillator is showing some short term negative divergence which is a concern. But because it has is a slight lag effect, this will rectify itself if we continue to get strong A/D readings. I emphasize short-term divergence because, since the climactic low which occurred in both the A/D and NH/NL in May, both indices have been making higher lows at every new price pull back with significant positive divergence showing up at the recent 1060 low. This indicated that we had probably made an important intermediate low at that price but, because of the intermediate term due to bottom in this time period, the unknown factor was how much of a retracement we were going to have. If these cycle lows are behind us, it should be clear sailing for a while.
Right now, the SPX has potential short term targets to 1150 and beyond. If we get there, how we get there, and what we do after we get there will tell us a great deal more about the nature of this rally and if and how much more consolidation will be required before moving higher. If the 2-year cycle has already made its low, then the pull back into mid - October will be brief and shallow.
What do we need to confirm the intermediate term trend break out?
Price action: The SPX must move immediately to 1150 or higher with only very minor corrections along the way.
Volume: This move must be accompanied by continuing good volume
Advances/declines: The ratio must continue to be strongly positive
New highs/new lows: This ratio must continue to expand.
The reason that the 1150 minimum price level must be reached before some consolidation takes place, is that, if this is truly the beginning of an intermediate term up trend -- as it appears to be -- not only would this represent a move to a higher high, but it would fulfill certain Fibonacci projections which should be met as an indication of initial strength. If the rally falters prior to reaching this level without meeting these requirements, it would make this break-out move suspect.
I am including several charts that will illustrate the technical positions of various market indices including the BKX, RLX and GE which are important leading/confirming indicators. I think that you will agree that there is not too much to be bearish about at this time.
The anticipated pull-back which will determine the fate of the intermediate term may have ended with a strong upward reversal on Friday. There is still an outside chance that there will be one more significant short term pull back into the middle of the month before the intermediate term trend really gets underway.
Specific criteria for a confirmed intermediate term buy signal are listed above.