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
The expected consolidation was delayed and the rally extended into this past week. Now that a 5-wave pattern is evident in the move which started on 11/22 and ended on 12/17, a more reliable short-short term top appears to be in place. This is confirmed by the breadth indicators which are showing signs of deceleration in upside momentum. The McClellan oscillator is back in slightly negative territory, and the NH/NL10% net differential has started its first downtrend since the early October top. These are indications that a more substantial top is in the process of forming. But more about that later.
All major indexes made new recovery highs this past week, and the Dow came within 15 points of its February 2004 high.
After a sharp initial drop, gold has moved into a sideways pattern and is being supported by its 50DMA while, conversely, the US Dollar is engaged in forming a bottom pattern which should eventually lead to more upside action.
Oil was expected to find support at about 40, and indeed it did, rising 6 points since last week's low. It is not quite ready to resume its long term up trend just yet, but this remains a real possibility later on next year. However, this should be preceded by a basing pattern which could last several weeks, or even months.
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 2005.
SPX: Intermediate Trend - The intermediate up trend is still in progress, but it may be ready for some corrective action into the end of January before pushing higher.
SPX: The Short-term trend is entering a corrective phase and after a few days of consolidation should benefit from the "January effect" starting around Christmas.
Because of market volatility, the short term trend is better analyzed on a daily basis with the help of hourly charts. This is done in our daily market updates and Closing Comments.
Daily market analysis: If you would like to receive an explanation of how I arrive at buy and sell signals and be notified on the day that they occur, please let me know at email@example.com.
Also, please read the important notice at the end of this letter.
Instead of ushering a top as had been its pattern since March 2004, the 6-week cycle ushered a low which prolonged the rally by another week. Since there is a clear 5-wave pattern that began on 11/22 and ended Friday 12/17, we can anticipate a very short term correction which could last until just before or just after Christmas. The seasonal influence at this time of year has been one of the most reliable patterns in stock market behavior, although the time period which is involved can vary substantially from one year to the next.
Structurally, this is the second five wave pattern from the 1190 low, which probably makes it a wave 3 from that low, and if the January effect brings about a new high, this would complete a 5-wave pattern. This would also complete a higher degree wave 3 from the August low. The first wave from 1190 -- if this turns out to be an impulse wave -- was obviously the extended wave, so wave 5, by Elliott Wave standards, should be shorter than wave 3 which just ended.
There is a valid Fibonacci projection to 1227 on the SPX which, as stated previously, is reinforced by the squared number 1225 (35X35). This could be reached in the first week of January if the year-end rally has enough of an impact.
There is evident deceleration taking place in the averages and over the past week the NASDAQ 100 has begun to under-perform the SPX. This is nothing serious yet, because it is not abnormal for these two averages to be occasionally out of step with each other. But it will become a concern if the negative divergence worsens and becomes more pronounced because it will spell trouble for the longer term trend of the market. The Nasdaq 100 tends to lead the broader averages and this is why it is important to keep a close eye on its relative strength to the SPX.
As stated last week, the controlling factor for the weeks ahead is going to be the 9-month cycle which, based on current market action, is now likely to make its low toward the end of January. This will create the first important correction since the October decline. The 9-month cycle will be helped by the short-term trading cycle which should bottom towards the end of the first week in January, and by the 12-week cycle which is scheduled to make its low in the third week.
After the 9-month cycle is complete, the up trend should resume, but will be temporarily interrupted by the 20-week cycle due to bottom about the second week in February.
Four charts appear below. The first two are the daily charts of the SPX and the NDX which are intended to illustrate the intermediate-term trend in both indexes since the August low.
The SPX is the stronger of the two. Note how it has been hugging the very top line of its up channel, whereby the NDX did not quite make it to the top in its last thrust. This is an indication that the NDX is beginning to lose some of its upside momentum relative to the SPX. It is not yet a problem, but can become one if this divergence increases substantially, because it would indicate the bull market may be coming to an end.
These two charts also show where the support is likely to be for the current pull-back. The SPX has a double trend line, and declining prices could stop at either.
I have also included charts of two leading indexes that we have viewed in the past to see what they are forecasting for the future course of stock prices. Both are still in a well-defined intermediate-term up trend which is supportive of the general market.
More top building action is likely into early January along with a good correction starting after that date and continuing into the end of that month. This should probably be viewed as a wave 4 of the move that started in August, with 5 to follow after the 9-month cycle has made its low.
Gold and the CRB index are still considered to be making an important top, while the US dollar may be making a major bottom. This process could take several more weeks to develop before the primary trend asserts itself to the downside for gold, and to the upside for the Dollar.
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I plan to spend Christmas week-end in California, so the next newsletter will be published on Monday December 27. After the first of the year, this newsletter will be published every other week.