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 two Weeks
The Wall Street wisdom about what would happen if Santa Claus failed to come proved to be prophetic.
The QQQQ gave an early warning and topped out in the suggested area, but it took most of the other averages until the first trading day of 2005 to begin their decline. Now, they are all moving in concert and reached the lowest point of the correction this past Thursday. By then, trend lines, channel lines and positive divergence in the McClellan oscillator, which had been deeply oversold, all conspired to give us a positive day on Friday.
It is apparent that, after the initial sell off, there is a great deal of deceleration taking place, and this is always the precursor to a reversal. Deceleration occurs when there are several cycles affecting the stock market simultaneously and they start to make their lows one at a time. This process is likely to continue until near the end of the month before we have a technical condition which permits a new up trend to develop.
The new high/new low index, a better gauge of intermediate term trend than the A/D, has continued to be positive during the entire retracement and in the last couple of days has began to turn up again.
After holding its $40 level, oil is staging its second rally and reached $48 late in the week.
Gold extended its decline in what appears to be an intermediate term correction from recent highs which could last several more weeks. However, the commercial traders have covered a lot of their shorts, and this suggests that gold may take a breather.
The dollar, a mirror image of gold, has been basing for about 5 weeks and could move higher as gold continues to correct. Put in a more correct way, if the dollar continues to rally, gold will continue to decline.
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 a short term correction is taking place which is likely to last into the end of January before trying to push higher.
SPX: The Short-term trend is far along in its correction and much closer to the bottom than the top.
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. The following was issued as the market declined into the close on Thursday 1/13:
Closing Comment: There are things that bother me about this sell-off, mainly that it is not being confirmed by the A/D and therefore may only be a test of the recent lows. The last thing I want to do is call for a sell and see the market rebound immediately afterwards. So, at the risk of losing an opportunity, I'll pass on this one.
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 ajg@cybertrails.com.
What's next?
We are approaching the end of a short term correction, but since some cycles are still due to bottom near the end of January, it is likely that we will at least test the current lows or go slightly below.
The McClellan oscillator had become deeply oversold and has already rallied significantly, but it is still deep in negative territory and lacks a clear pattern of positive divergence to price action. It will become vulnerable to reversing to the down side once again as it approaches the "0" line. This is one good reason to expect more consolidation and base building directly ahead. The NH/NL index has remained positive throughout the entire correction and this tells us that the intermediate trend is in no danger of turning down at this point.
Structurally, the pattern we are making in the SPX and NASDAQ may be a wave 4 of the move which began in August of last year, but it is unclear if it will complete itself by the end of January and will immediately lead to new highs, or if it will become a more complex pattern requiring more time. According to Elliott, wave 4 must differentiate itself from wave 2 either in time, length, or pattern, preferably all three.
Right now, the two patterns are far too similar, but if I am correct in my anticipation of more corrective action.
Into the end of the month, the similarity will no longer be there by then.
Cycles tend to support this analysis. The 9-month cycle is the major cause of the current correction, and once it turns up, it will join forces with the longer term cycles and this could result in new highs for the market.
The next important cycle to be concerned about is the 20-week cycle which makes its low in 5 weeks, but, like all cycles, it is subservient to the influence of larger cycles, so it may only bring about a minor correction in prices. In any case, as always, there will be plenty of warning from A/D, NH/NL, and momentum indicators. First we'll concentrate on identifying the low of the current correction and then we can turn our attention to the next top.
For the SPX some short term (Fib) projections were met and tested successfully this past week. However, the next projection is down to 1164. Since this corresponds to the lower trend line of the intermediate term up-channel, there is a reasonable chance that the decline will extend to that level. It will depend on whether we hold the current levels or not. I believe that the odds are at least 60/40 that the lows will be broken.
A brief analysis of other markets:
Gold and the Dollar: At the end of December, I had suggested that gold was completing a long-term
5-wave pattern which began in 1999 while the dollar was doing just the opposite, completing a 5-wave pattern to the downside. But it is also possible that this is only the completion of a large wave 3 which began in 2001, and that we are only entering wave 4. We don't have to decide on this just now, since even if we are only starting wave 4, it could be several more weeks before it is complete.
The dollar appears to be making a head and shoulder bottom with the right shoulder not yet complete. If this is correct, this will eventually lead to higher prices for the dollar and lower prices for gold. However, H&S patterns are formed by interacting cycles and require the right cyclic configuration to be reliable as an indicator.
Oil: As stated above, oil is probably still undergoing a correction which started at 55 and found support at 40. So far, this looks like a trading zone from which prices could move in either direction. However, it is likely that this commodity is still in a long term up trend and that we will eventually see higher prices before it tops out.
Weather: The string of unusual weather disturbances has extended with severe floods, mud slides and heavy snow falls occurring not just in the USA, but across large portions of the globe. In the last newsletter I suggested that these were caused by long term weather cycles which have been well documented by such researchers as Raymond H. Wheeler who devoted most of his life to understanding long term climate and weather fluctuations and their relationship to business cycles using data going back to the dawn of civilization. His research proved conclusively that long term weather patterns are cyclic, but their direct influence on the economies of the more developed countries is probably less than it used to be.
It is also probably more correct to look at weather as part of a larger picture which includes all geophysical manifestations that emanate not only from our planet (such as the recent plate movement which caused a tsunami), but also includes external influences such as sun emissions and other factors. To what extent severe weather disturbances are related to other geophysical events is only partially understood. Some are obvious, such as the effects of an eruption by a super volcano or a large meteor crashing on earth, because we have historical documentation of these events. But there are much more subtle aspects of climate and weather changes which we still do not comprehend. For now, all we can do is observe that they occur in a repetitious manner of varying degrees of severity.
Real Estate: Is there a real estate bubble? Yes, in some localities prices have gone into orbit because they have been more in demand than others, and some are already undergoing a normal corrective process. But you cannot say that there is a "national real estate bubble". The term "bubble" has the connotation of an imminent crash, and this could only happen if 1) mortgage rates were to shoot up as they did in the late '70s or 2) if we go through a period of severe deflation which brings economic chaos and affects all real values.
Since the Kondratieff Wave is currently in its winter phase, the former is very unlikely while the latter is a real possibility, but not for a few more years. The time to start worrying about this is probably after 2008.
Charts
This week's chart analysis is designed to update the current technical position of the market as well as show how the NASDAQ 100 often forewarns of the decline in other indexes. First, we will analyze daily charts for the longer picture and then fine-tune with hourly charts of both indexes.
The daily chart of the SPX and of the QQQQ give us a good feel for the current intermediate up trend by outlining the up channel in which prices are moving. It shows clearly that after the August low, the QQQQ led the market up as well as down. Look at the divergence which took place between the two indexes at points A-B and C-D.
Note also how the SPX is still trading in its up channel and the QQQQ has clearly broken out of it. What happens to this relationship when this correction is over will tell us a great deal about the viability of the intermediate and long term up trend.
Also, note that the daily oscillators at the bottom of the chart will require more time to get into a bullish position, which supports the contention made above that this correction could easily go into the end of the month.
The hourly chart of these two indexes gives more details of the current correction. There is a well-defined channel in both charts, and it is noticeable that the QQQQ is farther along in its correction than is the SPX. This is a good sign since, if this pattern continues, it will give us an advance warning of the coming reversal just as it did at the top.
Other things to notice is the relationship of the oscillators to price. In the SPX, it was evident that we would have trouble breaking to new lows right away as the A/D (middle oscillator) was in an unbroken up trend.
But if we are going to make further headway in the rally that started on Friday, we will have to break immediately out of the down channel, which is well-defined on both the price chart, and in the TICK (top oscillator).
Finally, the parallel lines which are shown at the bottom of the price chart on the SPX represent former lows which must hold over the next two weeks, or prices will most likely drop to the 1164 projection mentioned above. This will probably be determined by next Friday.
SUMMARY:
The correction which started from the 1217 level on the SPX is well under way and near completion, price-wise. Time-wise, it could continue until the end of January.
This is only a short term correction, and it does not threaten the intermediate trend of the market which is still up until proven otherwise. Higher highs are likely after this correction is over.
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.
