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
In my last newsletter, I spoke of the SPX short-term trend going to a minimum of 1222. That was the low end of the target zone. It actually reached the maximum price target of 1229 which had been given to subscribers in the daily updates. This was a new high for the move in the SPX, along with the NYSE, the Dow Industrials and the OEX. They all reversed on Monday March 7, which is what happens when a trend has reached its full potential. But it was a mixed market as the NASDAQ did not even come close to its previous high, and the Russell failed to overcome it as well.
Since the above date, a short term decline continued into this past Friday, but the last two trading days showed a loss of downside momentum which could forecast a short-term rally.
The McClellan oscillator has moved into deep oversold territory and does not show any sign of the kind of pattern that precedes a reversal of trend, so I have to assume that prices will work themselves lower over the next two or three weeks.
The NH/NL index has lost a good deal of its upward momentum and, although it is still positive, it suggests that this is only a correction and not a major reversal in the indices.
Crude oil appears to be affecting equity prices once again by challenging its former high and having the potential of going a little higher still to the 57/58 area.
Gold has continued to rally as the dollar has resumed its downtrend, but it still appears that this is nothing more than a basing pattern for the dollar which could end around 80 before reversing back to the up side. This also means that Gold has a little farther to go, and this is supported by the COT activity. Although the commercial traders have began to increase their short position, it is nowhere near the level which normally indicates an end to the gold run.
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 but, so far, this looks more like an extended correction of the move which started in October.
SPX: Short-term Trend - The short-term trend is down.
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?
Let's update various aspects of the market that were discussed in the last newsletter:
1. Structure: The wave pattern, which was then described as "ambiguous" is a little less so now and looks more and more like a "c" wave of an extended 4th wave correction from the move which started in August 2004.
2. Cycles: There are a number of cycles bottoming over the next few weeks which could keep the market working itself lower and perhaps entering a trading range until the first or second week in April
3. Volume: The volume was high at the top of the move and has remained fairly high during the decline. This suggests that selling has not yet abated.
4. Breadth: The McClellan oscillator is negative and does not show the kind of pattern which is usually associated with a low point. So we have to assume that the decline has farther to go, but it is also very oversold and equities could rally before going lower.
5. Momentum indicators: The daily indicators of the NYSE, Dow Industrials, and the SPX have remained positive and look considerably better than the A/D, but they have turned down.
8) SPX price projection: As stated earlier, the up trend ended at the high point of the projection zone. The current downward projection is about 1190, but this could be only a short term target. It will have to be re-evaluated when we see what kind of a rally we get from that level.
A brief analysis of other markets:
Gold and the Dollar: To re-iterate what was said above, the dollar has a little further to go on the downside and gold a little more on the upside.
Crude oil could still move higher before coming to the end of its current trend.
There are a lot of arguments pro and con to justify the current price of oil. But the higher prices go, the more dissenters are beginning to speak up. An article by Cliff Droke entitled "Inside the World of Oil Price Manipulation" which appeared on Safehaven on Friday March 11, may be of interest to those who seek objectivity by considering alternate points of view. Personally, I have no way of knowing which side presents a correct assessment of the current supply of oil in the world. But what I do know with certainty is that any trend, whether it is that of the stock market, gold, tulips, or oil is generated more by human emotion than by so-called "fundamentals" and usually goes to extremes before coming to an end.
I find it much easier to objectively analyze the technical behavior of the price of crude, and I believe that the long term trend is still up, but also that we are approaching the end of a 5-wave pattern which started around $40, and another one of higher degree which began at $25. If I am right about this, then oil could have a significant retracement in the intermediate future which would surely be a catalyst for the market to make new highs later on in the year.
Charts
Four charts are presented below: The first one is that of the NYSE which is the strongest index, and the second is that of the Nasdaq 100 which is the weakest one. The third and fourth charts are those of GE and the Banking Index, my two favorite leading indexes. You can see that these correctly called for a market correction by showing weakness ahead of the major indices, as did the NASDAQ. Now they appear to be stabilizing, and if they run true to form, they should start a new up trend several weeks before the rest of the market.
SUMMARY:
The last newsletter stated: 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 statement proved to be correct since the peak of the move was reached a few trading later. Now, the various indicators (and the McClellan oscillator in particular) suggest that the correction has farther to go, while cycle analysis tells us that a resumption of the up trend could still be a few more weeks away.
Another statement which was made last time also bears repeating: 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, that of 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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