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 NYSE made new highs last week, and the SPX, OEX and Dow Industrials did not, but are close to doing so. Worthy of notice, the Russell 2000, the NASDAQ Composite and 100, the Dow Transportation, the Banking Stock index, and GE are badly lagging and do not seem inclined to even challenge their highs.
Although the raw advance/decline figures were excellent on Friday, the McClellan oscillator is showing significant negative divergence and it would take several more days of continued strong positive figures to overcome this negativity. This is not likely to occur.
The new highs/new lows index is in the same fix. The 10% smoothed average of NH/NL peaked in early December and has remained below that level. It must be pointed out that this index is much more positive today than it was at the March 2004 high, so the top which is anticipated to take place near-term is probably going to bring about a milder correction than took place then.
There are a number of other technical reasons why we are probably very near the end of a short term move, and perhaps the intermediate term move which started in August of last year as well, but we will address those in "What's Next" and illustrate them in the chart section.
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 trend which started in August 2004 may be coming to an end.
SPX: Short-term Trend - The short-term trend is up but may run into trouble next week.
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?
There are a number of negatives which are becoming evident and which I will mention by category.
1. Structure: The structure which was ambiguous at the time of the last writing is still ambiguous where it concerns the intermediate term. It looks as if we are completing a 5-wave pattern which began at the end of January, but it is not clear if we are completing 5-wave pattern of higher degree from last August, or if we are just finishing the first subdivision of that pattern.
The lack of clarity stems from the fact that the various indexes are showing different pattern possibilities.
2. Cycles: By cycles, I am including not just conventional cycles which are measured from low to low, but all the timing factors which affect the stock market. Next week will be the 18th week since the October low, or 90 degrees in Gann parlance. It cannot be determined ahead of time if these time frames will mark a high or a low, but this clarifies itself as we approach that date. In this case, it has become fairly clear that this will be a high point and not a low, but it may turn out to be only a short-term high. The next cycle lows are scheduled for 5 to 6 weeks from now, so it is possible that the coming correction will extend into that time period.
3. Market behavior, volume: I would not for one minute imply that the stock market is manipulated, but Friday's action looked very much like it was engineered to panic the shorts and prevent them from covering at better prices. Since the volume dropped by 2 bl shares from the previous day, it suggests that there was something artificial about this move.
4. Breadth: I have already mentioned in the opening section that the smoothed breadth indicators are beginning to significantly under-perform the price action. Carl Swenlin of Decision Points commented a few months ago on the increasing volatility in the A/D as a result of decimalization. A stock can be up or down by one penny and affect the A/D figure. Smoothed averages such as the McClellan oscillators are much less affected and more reliable as an indicator. This is why, although Friday's 1723 net positive A/D, while impressive, must be followed by similarly strong positives in the next few days in order to dissipate the negativity building up in the McClellan oscillator.
5. Momentum indicators: As you will see on the chart below, the daily price momentum indicators are telling the same story as the breadth indicators. The combined showing of the two carry a strong negative warning about the viability of price action in the near-term.
6. Dow Theory: If there is still some merit to this theory, it would seem that the Transportation index is the leader and the Industrials the follower. The transportation index clearly led on the way up, but has recently run out of steam and now suggests that a reversal is near. But then, since both the Transportation Index and the Russell 2000 recently made all-time highs, they are entitled to some consolidation.
7. Andrews pitchfork: The most reliable trend lines and channels are created by this methodology. This is also illustrated in the charts below. You will clearly see that the odds greatly favor breaking below the bottom line unless a great deal of price strength is generated in the next few days.
8) Price projection: If we go above 1212 -- which has high probability -- we could extend the move to 1222, a Fibonacci and a P/F projection.
A perfunctory analysis of other markets:
Gold and the Dollar: This comment made in the last newsletter still applies: 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 is showing some resilience and could still move higher before completing what looks like a five wave pattern from the recent 40 low. A new high for oil cannot be ruled out eventually, since it still appears to be in a long term up trend. However, it may require some additional consolidation before doing so. Breaking below the 40 level seems extremely remote in the near/intermediate term.
Charts
A number of charts are provided in order to illustrate fully the current market position and the comments made in "What's next".
The first chart is a weekly chart of the NASDAQ Composite. Last Friday, it made a new high in its long-term trend from October 2002. It also shows a distinct 5 wave pattern since that date. The reason for the question marks next to the labeling is that it is not clear if this is a long-term top, or even an intermediate top, but it is almost certainly at least a short-term top. Note the negative divergence showing in the oscillators below the chart, but remember that divergences in any time frame must be confirmed by structure completion and subsequent price action.
The second chart is that of the daily SPX. This illustrates the trend from August 2004. Here again, a five-wave pattern is discernable, and here again the oscillators at the bottom of the chart are showing negative divergence. Also, you can see how prices are confined to the lower half of the up channel, and have already violated that lower trend line a couple of times. Third time is charm, and we should go through it, but how much weakness this will bring is still an open question.
Chart number 3 is an hourly chart of the SPX. This analyzes the trend from the end of January 2005 to the present. Here also, you can see a 5-wave pattern, but the 5th wave is not yet complete with Friday's action probably representing the top of wave 3, and the oscillators at the bottom are overbought, but not showing divergence. Ideally, we should do a wave 4 and 5 over the next few days and by then the oscillators may show divergence.
Finally, the last two charts of the NASDAQ 100 and of the Banking Index, are provided because they illustrate so clearly the divergence between these two leading indicators and the other indexes shown above. Please note, however, that the Banking Index, when viewed in the long term, has already retraced in a 5-wave pattern, and may be ready for a rally. What happens to that index in the next few weeks will determine whether or not we are coming to a long term top, or even an intermediate one.
SUMMARY:
The strength in the averages in the last week is more likely to be a terminal move which has a little more to go and not the beginning of something substantial. The above detailed analysis supports this contention. It is not clear, however, if this is only a short-term top or an intermediate-term top.
There are at least two main reasons to be cautious about how much weakness lies ahead: 1) The long-term cycles are still up strong, and the next major cycle low, the 4-year cycle, does not come until October of next year. 2) When considering the influence of the decennial pattern, the 5th year is one of the strongest, and it would be an aberration and betting against history to expect a great deal of weakness to start so early in this year.
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