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 was another positive week for the stock market with all the major indexes making new highs for the move and with the NASDAQ overcoming its previous January high by a very small margin. So far, only the Dow Industrials and the S&P 100 have not surpassed their former yearly highs, but they are very close.
The new highs/new lows continue to excel recording 475 or better net new highs in the past three days of trading. The advance/decline, however is beginning to lose some momentum, alternating between positive and negative days, which caused the McClellan oscillator to dip slightly in the negative on Thursday and barely make it back to the positive on Friday. This is a sign of a mature short-term trend and suggests that a top is very near.
Oil took a plunge, trading as low as $42.05 and closing the week at 42.50. When oil was on its way up, I suggested that there were some firm projections to 55, and after it started down, I expected it to move down to 44/45. It actually went slightly beyond that, but since it has good support in this area and is very oversold, it may rally from here, at least temporarily.
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 very 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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In the November 21 Newsletter, I mentioned that since February of this year, the Dow had established an unusually regular pattern of six-week trends. Next week will be week #6 of the rally which started on October 25, and judging by the fact that prices appear to be struggling here and that the McClellan oscillator is showing strong negative divergence, one would have to conclude that this rally is living on borrowed time and that the six-week pattern is likely to repeat itself once more by bringing about a reversal of the trend.
There are a number of other reasons to believe that the rally is ending. I had stated earlier that the SPX had valid Fibonacci projections to the 1190/1200 area. On Friday it traded as high as 1197.46 before retracing. More importantly, as you will see on the charts below, it -- and other averages -- are approaching a formidable resistance line which will almost certainly stop the advance.
But there could be just a little more to go. What appears to be the last leg of this move from 1090 --we'll call it wave 5 -- has only completed two small up legs from 11/22, which date also marked the low of the short-term trading cycle. We appear to be in the process of correcting the second short leg (wave 3) and after this correction we should have our final push and could reach 1200 or close to it. Structurally, we could also be making what EWT calls a terminal pattern which is caused by a wave 5 failure.
There is actually another valid projection to 1228, which is reinforced by the square number of 1225 (35X35) and which could be the target for the final short-term or intermediate-term high, but that would probably have to come after some consolidation.. Gann was fond of using square numbers to project the end of a move. We'll have to see if this one has any future significance.
The weekly chart of the SPX which appears below shows trend lines and channels drawn with a technique discussed previously. The "X" line, drawn from the 12-year cycle low of October 2002, is the median line and two parallel lines to it are drawn from the next two lows. Notice how the median line provided resistance to the up trend and was never penetrated to the up side.
The first parallel line formed the bottom of the up channel for the first phase of the move, and when it was penetrated, its extension provided resistance all the way to the top of the move.
The second parallel was drawn from the March 2003 low and it gave support for the remainder of the up trend. When it was finally penetrated, this was the end of the entire move and an intermediate correction set in.
A similar pattern is now being repeated. Line "Y" is drawn from the March 2003 low using the same methodology as the "X" line. Here, a parallel is drawn on each side of it from a low point.
Notice how the upper parallel stopped the rally when it was touched. And now, the current rally is just about ready to touch the underside of the extension of line "Y". This is the perfect spot for the move which started at 1090 to end, and for a reversal to occur. This is also a reason why the 1228 projection may not be filled -- at least not right away.
One more observation: The lower parallel line drawn across the October 2004 low is the support line for
the current up trend. When that trend line is penetrated to the down side, it will mark the end of the intermediate trend, and perhaps the long term trend as well.
Trend and channel lines drawn according to this technique have a near infallible record of being the true trend and channel lines for any move. They are not arbitrary, but are drawn according to very specific criteria. They also work well for any time frame and signal the beginning and end of each fractal pattern. Like all technical methods, they are best used in conjunction with cycle analysis and other technical tools.
The next two charts are daily charts of the Dow Jones Industrials and of the NASDAQ 100, and they show the same valid trend and channel lines. You can see how accurately they indicated the end of the intermediate down trend, and the beginning of the new up trend.
The markets once again extended their gains, this week. And there is additional confirmation that the end of the move which began in October is near, and that this could lead to a retracement for several weeks.
Since the current rally is probably the 3rd wave of the move that started in August for most indexes, a correction, when it takes place, will not signify that either the intermediate or longer trend is coming to an end. The combined 12-year and 10-year cycles will continue to provide support for higher prices into next year, but with the 9-month cycle low expected in the next few weeks, this would be a good time for a pause to occur.