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 seasonal tendencies are interacting with topping short term cycles and producing some cross-currents in the financial markets. The QQQQ -- which is representative of the NASDAQ 100 -- is the weakest of the major indexes and topped out in the suggested time frame. It has been influenced the least by the year-end rally. However, even though they have eked out higher prices, most indexes show a pattern of deceleration which began in late November after the initial upward thrust, and which has become more and more evident in the past week.
The "Santa Claus" rally, brought very little price appreciation to the existing trend, and the Dow Industrials Average was down slightly for the week, while the NYSE index, a much broader-based index has performed better.
The split performance of the averages could be a problem for technicians, since they don't know which one is representative of the market condition. This is where cycle analysis is helpful.
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 which turned up in the Fall of 2004. A top is likely in 2005.
SPX: Intermediate Trend - The intermediate up trend is still in progress, but it may be near some corrective action into the end of January before pushing higher.
SPX: The Short-term trend should soon be entering a corrective phase, but this could be delayed until after the "January effect" has run its course.
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 notices at the end of this letter.
There is an old Wall Street adage which goes like this: "If Santa Claus fails to call, then bears will come to Broad and Wall!"
Clearly, the Dow went nowhere in the past week, but some other indexes pushed higher, so the prediction should be fulfilled with a moderate decline which will be brought about by several short term cycles and the 9-month cycle, which are all due to bottom in mid to late January.
We still have to contend with the January effect. Friday's action, even though it came very close to issuing a short-term sell signal, was neutralized by some buying which came in the last few minutes of trading. Whether this is meaningful cannot be assessed until Monday because Friday was also a time for portfolio dressing for the last day of the month, the last day of the quarter, and the last day of the year!
The 9-month cycle (as opposed to the 40-week cycle which is a totally separate cycle but easily confused with it by most cycle analysts) deserves some special comment. Looking back at the historical performance for the past 20+ years, its influence seems to be felt more during bear markets and in conjunction with other important cycles making their lows.
As an example, in 1998, the 9-month cycle low came within a few weeks of the 4-year cycle and caused a sharp decline in the market followed by a powerful rally. In September 2001, it made its low in conjunction with the 7-year cycle and this combination produced an even sharper decline. It should also be pointed out that major cycle lows often coincide with major events which have economic repercussions, such as the Long Term Capital Management debacle in 1998 and the terrorist attack of 9/11.
In bull markets, however, the influence of the 9-month cycle appears to be considerably reduced. In May 2003, it produced hardly a ripple which made it difficult to identify and made me wonder if somehow it was no longer a factor. Its next low came in March 2004 in conjunction with the 6-month cycle and brought about a short, but sharp decline.
The next cycle low, which is due toward the end of this month, is likely to be fairly mild since it is opposed by the longer cycles (12-year and 10-year) which are still strongly in an up trend. But after it bottoms, it will be instrumental in extending the intermediate term trend into February and March, for an intermediate term high. This could also mark the end of the bull market.
Another interesting feature of the 9-month cycle is that its average length of 41 weeks is nearly .618 of the 72 week (360 days) Gann degree which has a considerable impact on the financial markets.
More on Cycles:
Cyclic influence is not confined to the stock market. Time itself is cyclic, which means that everything in the universe, being of a temporal nature, is affected by cycles. Of particular impact to the human race are war, geopolitical, social, and geophysical cycles.
The powerful hurricane season which brought havoc to Florida, and the major earthquake which created the devastating tsunami are representative of the current period of increased geophysical disturbances. They were preceded by unusual weather patterns throughout the world such as massive flooding, and the extreme heat wave which affected France not long ago. It would not be surprising if other earth changes of this magnitude took place in the next few years. The long term cycle lows which will occur between 2010 and 2014 will have a major impact, including a severe effect on the world's economies. You may recall that the 1930s depression, which was caused by the 40-year cycle low, was accompanied by the "dust bowl" era.
There is no way to quantify the potential damage which will result from these disturbances, but a warning that we are entering such a period of time should lead to a state of readiness which will minimize its consequences.
This may sound very deterministic to most people, and if this is what you choose to label it, so be it! But consider the larger geophysical manifestations to which we are inextricably bound such as the cyclical patterns of the moon around the earth and the earth around the sun, amongst thousands of other natural cyclic events.
The following recently appeared on George Ure's web site: Urban Survival-Replaying 1929.
Massive Earth Changes Beginning?
Not only are we picking up from the killer tsunami now, but there's been a Russian volcano go active overnight - another indication of how the delicate Pacific's Ring of Fire can be easily upset when there's large-scale earth movement: Russian coverage at Novosti.
At Mount St. Helens, too, the watch continues because no one knows when North America's most famous recent volcano will come roaring back to life: http://www.columbian.com/12282004/clark_co/226981.html
The volcanic and earthquake activity is only a part of the problems ahead for 2005. We are renewing our warning about dangers to the Alaska Pipeline due to permafrost melting - a phenomena that's already gaining notice in Fairbanks: http://news.bbc.co.uk/1/hi/sci/tech/4120755.stm
Those are the facts. But in reaction to the facts, a couple of readers have asked "Is this the beginning of the woes that alleged psychic Edgar Cayce spoke of?" In particular, one reader wondered about Cayce's alleged forecast of a massive South Seas quake before Mount Rainier and Mount Etna gong off simultaneously would herald the arrival of a Great Quake which would innudate large parts of the American Southwest coastline. However, upon inspection of literally dozens of pages of supposed Cayce forecasts, I found little evidence that his forecast was anything more than chance predictions as his forecast of a pole shift in the 1969-1998 timeframe failed to materialize: http://www.huttoncommentaries.com/Other/Sources/Sources_Veracity_P2.htm
On the other hand, should we over the next month, or so, see Mt. Etna and Mt. Rainier go off, we would ratchet up our concerns to a higher level because we know from web bot work that when you enter the area of forecasting the future, getting the specific date right is incredibly difficult. That said, we also know that subscribers to the current run will be especially wary of tomorrow (Dec. 30th) as a potentially important day in terms of changes to the Terra entity in model space, but again the caveat is that whether it's Cayce's work or interpreting 20-million data samples in the current bot run, time is the least reliable aspect of future forecasting.
While the future forecasts from web bots - and alleged psychics like Cayce - often seem to miss precision on the timeline, there's an interesting line up of planets that could, as one Indian op-ed piece notes, cause widespread destruction around the planet over the next couple of months: http://www.indiadaily.com/editorial/12-29-04.asp
Key quote: "According to some Indian scientists, Venus, moon and Jupiter is pulling earth away from the Sun in the same one line. The linear momentum can devastate the world in the next few months."
I am providing a daily chart of the QQQQ and the NYSE which will contrast the performance of one of the strongest and the weakest of the averages. In both cases, the intermediate trend is well-defined by trend lines and channels. The QQQQ appears to be ready to break to the downside of the channel, while the NYSE is pushing the upper portion of its envelope. It will be interesting to see how these divergences play out in the continuing bull market scenario.
The year-end pattern which continues to influence the price action of the major indexes has produced mixed results. The indicators have been flashing negative warnings for a while, suggesting that prices are about to reverse. But if the January effect prevails, we may have to wait for a few more days for this to occur.
Since a short term cyclic low is due in mid to late January the reversal is not a matter of if, but a matter of when it will take place.
I WISH YOU A HAPPY, HEALTHY AND PROSPEROUS 2005.
Beginning now, this newsletter will be published every two weeks. If you have visited my website recently, you must know that the "SUBSCRIBE" area has been activated Beginning on January 1, 2005, upon request, readers not previously enrolled will be entitled to the daily market comments FREE for a 6-week trial period. After that time has expired, they can choose to subscribe on a yearly or quarterly basis. Full details are available on the website "SUBSCRIBE" section, including a choice of yearly or quarterly subscription terms.