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
Congratulate yourself! You are a survivor of the much-touted October Massacre!
What exactly is the October Massacre? Nothing more than the 12-month cycle which makes its low in October pretty much like clock work. Some years, as last year and this year, the effects are fairly mild. But when it is reinforced by a larger cycle, as it was in October 2001 when it made its low in conjunction with the 7-year cycle, or every four years as the last 12-months of the 4-year cycle, it earns its name by causing a sharp sell-off in stocks to occur.
You may recall that about a month ago I spoke of a nest of cycles bottoming in October during a three week period, including the 2-year cycle from October 2002.. I thought that this cycle had bottomed early because there was a fairly good rally instead of continuing down. Alas, I was wrong! And there was more selling into last week.
But this is not only a 1-year or 2-year cycle bottoming in this time frame, this is also probably the low of the 10-year cycle, and if this is "all it's got", it is indicative of the great underlying strength of the market.
I have been saying for some time that the 10-year cycle has probably already made its low. Is this a contradictory statement? NO! Because the price low and the time low in long-term cycles are not always identical. The price low may very well have been made in August at 1060 SPX, and we are now at the time low.
In the chart section below, you will see how last year an almost identical pattern occurred in this time period and, more importantly, what came next. There are some differences this year, because the 9-month cycle low which I believe is due in December may curtail the coming rally. On the other hand, if the 10-year cycle has in fact made its low, it will be an important player in the days and weeks ahead.
The weakest index always suffers the most in these circumstances. The Dow was clearly the big loser last week and the only index which displayed the type of climactic selling which occurs at the end of a major cycle. The NASDAQ, the Russel 2000 and especially the Dow Transportation Index were much less affected.
What makes this time period interesting is that it may explain why the Industrials have thus far failed to confirm the Transports under the Dow Theory, but may now be in a position to do just that. It is also possible that this will have to wait until after December and the 9-month cycle 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 considered to be in an up trend with the top likely in 2005.
Intermediate Trend: A BUY SIGNAL was issued this past week subject to certain criteria listed below.
The Short Term Trend correction appears to be over 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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Last week I mentioned that oil had a big psychological impact on the markets. This is part of the fear psychology generated during the bottoming process of an important cycle. That's what cycles do! They cause investors to panic at their lows and become reckless at their highs. As for oil, I had mentioned that the probable target was 54. It's obvious that there is some topping action taking place in this area, although the structure allows for a final 5th wave to take place and we are apparently in the process of doing that. 55 was reached today and we may even go to 56 before it's all over. In any case, the fear psychology induced by oil was considerably allayed today when Chairman Greenspan threw some "calming oil" on the troubled waters. Isn't it wonderful how cycles work? They create the instrument of fear until they have made their lows and then they create the pacifier which removes the fear when they turn up! I tell you, nature is just simply amazing.
My guess is that there will be a little more selling or base building early next week and then the rally should start in earnest by mid to late week. If it replicates the conditions of a year ago, then you are looking at probably 2 to 3 weeks (and perhaps longer) of up prices before the effects of the bottoming 9-month cycle are felt. Another fact which could influence this rally is that the 40-week cycle made its low 2 weeks ago and will be supportive. Last year, the low of this cycle was 7 weeks after the 12-month low and provided a restraining influence. And then, there is the election!
Anyway, this is a scenario which will have to be monitored on a daily and weekly basis until the rally appears to run out of steam.
What do we need to confirm the intermediate term trend break out?
Perhaps we now have the conditions needed to confirm the intermediate term buy signal. They are still the same:
Price action: The SPX must move to 1150 or higher with only very minor corrections along the way.
Volume: This move must be accompanied by continuing good volume
Advance/declines: The ratio must continue to be strongly positive
New highs/new lows: This ratio must continue to expand.
The volume was impressive on Friday with 1.65 billion shares traded on the NYSE. Of course some of this may be due to options expiring. But the market was up, so it's a positive! Also the advance/decline ratio was moderately bullish and the most positive it has been in two weeks.
Charts: I am including a chart of the Dow Jones Industrials going back to September of last year so that one may compare the chart patterns in the last October period with today's. The October lows are marked with a dashed line. Note how similar (not exact) the patterns were prior to the lows. Also note what came after the last October low. Is this what's ahead?
For those who follow the McClellan oscillator, I am also including a chart of that index so that one may compare its past chart pattern to today's. Lot of similarities here, also.
The third chart is of the NDX/SPX ratio. This is a chart that some technicians follow because there appears to be a tendency for the NDX to lead. Currently, the ratio is strongly positive in favor of the NDX. This would imply continued strength in the markets until it is reversed.
The market decline which is normally associated with the "October Massacre" took place this past week and seems to have bottomed on Friday, although there could be a little more selling early next week. Since this may also mark the low if the 10-year cycle, stocks could be starting an important advance from this level. If this is the case, it will become evident in such statistics as volume, advance/decline and new highs/new lows ratios.