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
This past week, the stock market showed its impartiality by administering the same dose of medicine to the bears that it had provided for the bulls in the previous two weeks. The Dow Jones Industrials rallied 336 points from its low to his high, and closed near the high. The same was true of the SPX which rallied 41 points from its low and also closed near the high. Volume and breadth fully confirmed the move. What caused this and what does it mean?
Two main causes are apparent. The first is the fact that this is a pattern which occurs every year like clock work, as the past few years -- even during the recent great bear market -- readily demonstrates. I believe that the real cause is cyclical and that it is the work of the yearly cycle which bottoms in October, causing the "October Massacre". The bullish trend tends to last at least through January, and longer in bull markets.
In addition, as pointed out earlier, this year is also the bottom of the 10-year cycle, and this should not be ignored.
The secondary cause which will undoubtedly find a more ready acceptance is that crude oil reached its ceiling this week. I had mentioned previously that it should top out between 54 and 56, based on Point and Figure projections, and this is what it did. There has now been enough distribution at these levels that it is likely to retrace to the 44-45 level in the coming weeks. With oil topping out, a huge psychological burden has been removed from the stock market.
Can we keep on going? There is one more hurdle to jump before we can say for sure, and it is right around the corner. Conventional wisdom (an oxymoron) states that if John Kerry is elected president, the market will go into a tail-spin. It seems to me that with the polls saying that things could go either way, if the market was really worried about the outcome of the election, it would hold its breath until things have been decided. But it clearly is not. In any case, why speculate. We'll know in a couple of days!
Was this reversal predictable? In the last newsletter I provided a chart which graphically demonstrated that whenever the Dow Industrial index broke to new lows with a certain pattern of non-confirmation by the McClellan oscillator, we got the same results. Also, Last Monday morning, I made the following comment to the readers who are on my email Alert List:
Monday 10/25 Morning Comment
Today could be an important short term reversal day which could bring about the best short term rally, so far.
The SPX had strong Fibonacci and P/F projections to the 1090 level and the QQQ to 35.50. Both have come very near those prices and found temporary buying. If these levels hold throughout the day and we get the right kind of readings in the TICK and A/D indicators, then we will get a reversal. Already, positive divergences are appearing in both on the 10-minute charts. These readings now need to show on the hourly chart.
Oil is beginning to cooperate by selling below 55.
Current Position of the Market.
SPX: 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.
SPX: Intermediate Trend - The BUY ALERT will remain in place until we see if the election results will have an effect on the stock market.
SPX: The Short Term Trend correction clearly came to an end this week and was showing no sign of reversal by the end of the week.
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.
Note: If you would like to receive an explanation of how I arrive at these signals, how to use them in a trading strategy and be notified on the day that they occur, please let me know at email@example.com.
The Short Term Trend is being monitored continually through daily Closing Comments.
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For the time being, it looks as if the Dow and the S & P are playing catch up with the rest of the market. Other indexes did not have nearly the same percentage gains this week. Will they continue in concerted fashion from this point on? We'll know after Tuesday. It cannot yet be said that the SPX has resumed its intermediate term up trend when it is still 11 points below its September high, but it did, once again, close outside of its intermediate down channel which extends back to March of this year. Also, since moves always occur in at least 3-vave patterns and this rally only has one wave up, one would assume that there will be a consolidation followed by another up wave to a new high. I suppose that it is always possible that this time is an exception, but it is preferable to bet on the norm rather than the exception, just as it was better to anticipate that this October would be the same as a whole string of previous Octobers.
Last week I stated that in my humble non-expert opinion (in interpreting the Elliott Wave Theory), I thought that the Dow Industrials was ending its correction with a flat. I am no longer so sure. Perhaps it was a zig-zag instead, and if so, the intermediate correction may be over. Next week will tell.
Another point to keep in mind is that oil is expected to keep on moving lower for the foreseeable future. This should be a strong positive for the stock market.
Still, we need to wait until after the elections before making a definite pronouncement.
I am including a chart of the SPX which shows how it is, once again, attempting to move out of the upper confines of this intermediate term channel. Also note that it is coming up under a former trend line which could provide some resistance, at least temporarily. If it should move above that trend line, it would be a sign of strength.
Also included are the charts of two strong leading indicators, the BKX and the XBD which are both forging ahead and don't seem to care very much who our next president is going to be.
The Dow made new lows for the year on Monday, but then staged a powerful rally to end up near its best levels on Friday. The SPX performed similarly, but other indexes were less sanguine.
One big area of uncertainty was removed when oil finally topped out. Its range for the week was a high of 55.65 on Tuesday and a low of 50.47 on Friday, closing the week at 51.76. This was its worst performance since August and it helped trigger the rally in equities.
The next uncertainty lies ahead in the form of the presidential election. How it will affect the stock market is uncertain, and we must wait and see for a couple more days to determine whether this budding rally is for real of just a flash in the pan.
The gold commercial traders have once again increased their short position this past week. They seriously believe that gold has little room on the upside and is ready to retrace. Since this could not happen without a rally in the dollar, this should also be expected.