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
Last week's newsletter stated: "The correction is not expected to be either long or deep, and could be over by the middle of next week. A good reason for the low to take place mid-week is that, seasonally, the first part of the Thanksgiving week is weak, but it finishes strong." And later: "With the short-term cycle due to make its low next week, the odds were high that a top would occur last week. When the short-term cycle causing the current reaction turns up it will add its upward push to the longer cycles which recently made their lows."
This pretty much described last week's market action. The short-term trading cycle made its low on Monday, and for the rest of the week the trend was up -- except for some mild profit-taking in the last two hours of trading on Friday -- and indexes closed near their best levels of the week. The Dow Industrials and the SPX did not make new highs, but the NYSE, NASDAQ, QQQ and Russel 2000 made new highs for the move. The Russel 2000's new high also represents an all-time high. The Dow Jones Transportation Index continues to make new 5-year highs as well.
The rally does not have the dynamic quality that it had earlier, which is to be expected. As we approach the top of a trend, deceleration is evident as there is less and less buying and more and more profit-taking. But with almost 400 new highs recorded on each of the past two trading days, and the A/D remaining solidly positive the whole week, the breadth of the market continues to be supportive.
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 now reinforced by the 10-year cycle. A top is likely in mid-2005.
SPX: Intermediate Trend - A strong intermediate up trend is in progress.
SPX: The Short-term trend continued up for the week, but could come to an end in the near future.
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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An Elliott Wave analyst's forecasting ability is dependent on the correct labeling of the wave sequence.
This is not always easy, even in impulse waves which are usually easier to label than corrective waves.
When a strong move occurs, the smaller waves are often stretched out with only minor corrections and several sub-divisions. Frequently, the structure only clarifies itself as the trend nears its end.
This has been the case with the move which began at 1090 and is still progressing upward. What appeared to be a wave 5 pattern ending at 1188 can now be considered the end of wave 3 with wave 5 now underway. We may not know for certain until the entire move is complete. Fortunately, unlike Elliott Wave Theorists, structure is only part of our analysis, and we have other technical tools to help us identify the beginnings and ends of market moves and to reduce the degree of ambiguity.
Earlier, we had also considered that the move would extend into late November or early December, close to the half-way mark of the 12-week cycle. Next week will be week #5 of the move from the October low, and if this marks the top of the short-term trend, it will be close enough to what had been predicted. Since 5 is also a number in the Fibonacci sequence, it may, just as 3 (weeks) did, bring about a reversal of trend.
Finally, I had stated earlier that there were Fibonacci projections for this move which could take us between 1190 and 1200. Those targets are still well within reach.
After the short-term trend comes to an end, we should expect a corrective wave to occur, most likely an
a-b-c pattern which would retrace between .382 to .486 from the eventual high point. Since the top is not yet certified, we will have to wait until there is a clear reversal to make projections.
More on the Dow Theory: In a recent article, I proposed that it's just possible that the Dow Theory is no longer as functional an indicator as it used to be. Change, in any aspect of life, is resisted by individuals who have a vested interest in preserving the status quo. But the world moves on, and what was once a good theory, insight, or modus operandi, frequently becomes invalid as circumstances change and human awareness evolves.
Recently, there was an article published on Gold Eagle entitled "Requiem for the Dow Theory" by John Tyler. The opening paragraph reads: "It is with great sorrow that we come here today to give thanks for a great theory which has now passed to the other side." It then goes on to list a number of arguments to support his point of view, including a number of charts and indicators. Since this is a rather lengthy article, I will let you read it rather than attempting to summarize it. If you are interested, just click on the following link: http://www.gold-eagle.com/editorials_04/tacinv112304.html
I an including a chart of some of the major indexes showing the current trend, support and resistance lines, and the condition of the various oscillators.
On the NASDAQ and the SPX, the solid lines indicate the long-term trend, while the dashed lines indicate the intermediate-term trend.
Also, the Dow Industrials and NASDAQ charts only show the MACD and STOCHASTICS, but on the SPX chart, the two tops indicators (TICK and A/D) tend to give advance warning and clearly show that a short-term top is near.
The markets extended their gains, this week, with several indexes making new highs for the year.
However, both the wave structure and the condition of the oscillators suggest that a top of the powerful rally which began in late October may be near.
A correction, when it takes place, will not signify that either the intermediate or longer trend is coming to an end. Higher prices into next year are still anticipated, but with the 9-month cycle low expected in the next few weeks, this would be a good time for a pause to occur.