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 cycle low forecast for the last week in January proved to be correct. Equity indexes rallied from the lows made in that time period and closed last week very near their highs of the rally, with the Dow Jones Industrials showing the most strength and coming close to their December high, and the QQQQ continuing to be the worst performer. And now, the Russell 2000 has also began to under perform. This type of divergence is a sign which should not be ignored. In the past it has led to a market top of some sort.
This is reinforced by the performance of the McClellan oscillator and of the NH/NL index, both of which are showing short-term negative divergence to prices.
Two leading indicators which have an excellent record of predicting reversals, the banking index and GE, are also flashing a caution signal. Their charts appear below.
All of the above indicates that we are approaching a short-term top, at least.
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, in spite of the rally of the past two weeks, it may require some additional correction.
SPX: After reaching a low point in the predicted time frame, the Short-term trend turned up and had a two-week rally, but now appears to be near another reversal to the down side.
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 ajg@cybertrails.com.
What's next?
Two weeks ago I said: If we don't get a decent rally in the next few days, I may stop paying attention to the 9-month cycle. It has been very unreliable in the past couple of years.
The market action of the past two weeks tells us that the 9-month cycle did, in fact, make its low during its normal time span. However, there are two cycles which will interfere with the up trend in the next 1-3 weeks. The first is the 20-week cycle whose ideal low should come next week, but could extend into the following week. The end of February will also mark the 18th week since the October low. This is a Gann "degree" of time measurement which often brings about a reversal, although it could turn out to be either a high or a low. Since it also coincides with a 6-week cycle low, the odds favor a low.
Structurally, the two most likely possibilities are: 1) The market is still in a corrective wave and is about to complete the "B" wave or an A-B-C correction, or 2) one could also label the rally of the past two weeks as a 5-wave structure which would be the first wave of a larger pattern. Whichever structure this turns out to be, when completed, either one should result in new highs for the market.
A less likely possibility would be a more extended correction that would last several weeks.
A brief analysis of other markets:
Gold and the Dollar: The shorting activity of commercial traders is undoubtedly the best forecasting tool for the trend of bullion. For some time, it has been flashing signs of a reversal in the price of gold, and this past week, it has finally happened. After dropping to 410 in a five-wave pattern, gold had a good bounce in the past two trading days. It is expected to continue to retrace part of its recent decline, but this will probably be followed by lower lows over the next couple of months.
Conversely, the dollar may have reached its short term objective of 85/86 and may be ready for additional base building before moving higher in a counter move to gold.
Crude oil reached its short-term bounce objective of 49/50 before dropping to minor support at 45. It could continue its bounce to about 48 before dropping back to 43 where it will find better support.
Charts
The charts provided this week are those of the daily SPX, GE, the bank index, and the NDX/SPX relative performance chart.
The SPX chart continues to trade in an intermediate uptrend. After touching the bottom trend line of its up channel, it is rebounding towards the median line, which is fairly normal. Fibonacci and Point and Figure projections were for a maximum of 1211/1213. It will have a chance to get a little closer to these projections in the next trading day, but with the decelerating pattern which is taking place in the McClellan oscillator, the NH/NL index, and the price momentum indicators, it may not quite make it to that target before reversing.
Negative divergence to the SPX is readily apparent in the chart of GE, and is even more pronounced in the bank index, especially when comparing the current price to the January high. Since the beginning of the year, the performance of this market segment has been poor and probably indicates that a market top is forming. The longer term trends of GE and of the bank index are still positive.
The last chart, the NDX/SPX relative price chart is representative of the underperformance of the NASDAQ 100 to the SPX, and has the same connotation as the signal given by the two leading indicators.
SUMMARY:
The market bounced after reaching a cycle low at the end of January, but the short term advance is running into difficulties and is likely to reverse at any time. The relative weakness of the various NASDAQ components to the Dow and SPX are flashing signs of caution.
The coming retracement will tell us the nature of the structure of the move from the December top. Some of the weaker indices will undoubtedly make new lows for the move, but the Dow and SPX may hold their January lows for now.
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