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
There was a little more October massacring going on this week, principally in the Dow Industrials which broke to new 2004 lows. At the other end of the spectrum, the NASDAQ 100 (NDX) briefly traded at new recovery highs, but failed to sustain its gain and sold off along with the other indexes when the Dow weakened. The Dow is the only average making new lows for the year. All other indexes made their lows in August and are holding well above.
This past week showed an improvement in the tone of the advance/decline and new highs/new lows ratios, both of which are trying to get back into an up trend. Unless this changes dramatically, and soon, there is no likelihood of this being the beginning of a significant decline, but, rather, is indicative of a market which is trying to find its footing.
The selling on Friday was a 2-hour affair which started when it became apparent that the Dow could not extend its short term gains. The last hour was basically sideways with no follow through selling.
Oil is having a hard time getting above 55, having tried, and failing, three times to reach 56. Its close on Friday was on the weak side.
Gold is testing its former highs, a function of the dollar testing its lows. The gold COTs show that, for three consecutive weeks, the commercials have the heaviest short positions since the last time gold was at this level. They have been correct just about 100% of the time, so I would expect gold to decline while the dollar rallies in the near future.
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 recently subject to certain criteria that were never met.
Given the current position of the SPX, it makes more sense to switch back to a BUY ALERT. The criteria to determine a buy will be altered by the changing conditions of the market.
The Short Term Trend correction failed to come to an end this past week and although some positives are beginning to appear, they will have to be sustained to bring about a price reversal. 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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The worst case scenario would be for the markets to continue declining into the December 9-month cycle low. This is not expected at this time, at least not without some good rallies along the way. Although the Dow Industrials average made a new low for 2004 this week -- its fourth this year -- past patterns have failed to follow through with significant weakness but reversed shortly thereafter and produced a good short term rally of 4 to 6 weeks. The same non-confirmation of the new low which occurred in the A/D at each low point seems to be happening again. At first glance, it appears to be "déjà vu!" (authentic French version)
Structurally, however, this time looks a little different. The whole decline from the March highs could be a running correction with a zigzag (a-b-c) followed by an X wave, followed by a flat, which is nearing completion. To complete, the flat would need a rally and another decline to slightly lower lows. It looks as if we are currently in wave 3 of the c-wave of the flat.
The other indexes look as if they are simply making an a-b-c corrective wave after completing their first up wave from August 12 to September 21st. All these patterns could be completed within the next two weeks.
This is the most logical analysis of current market structures. We'll follow up on this scenario to see if it is validated by future market action.
I am including a chart of the Dow Industrials, the NASDAQ 100, and the Russell 2000 illustrating the contrasting structures and labeling them according to the analysis given above. The oscillator at the bottom of the page is the MACD of the A/D ratio. It makes a pattern which is nearly identical to the McClellan oscillator.
The Dow made new lows for the year, but all other indexes are holding rather well by contrast. They probably will not be able to resume their up trend until the Industrials have made their final lows and until they have completed their own corrective patterns. This could be just a couple of weeks away.
It might be helpful to remember that the Dow Industrials average consists of only 30 stocks, some of which have taken severe hits lately due to special circumstances and that this is having an effect on the performance of the average. All other averages which are made up of thousands of individual stocks are far more representative of the health of the economy and are giving us a completely different picture. Unless technical conditions turn for the worse, the current weakness is not considered to be the beginning of an important decline.