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 decline which began on 3/07 has come to an end -- at least temporarily -- for all indices except for the transportation index which made a new low on Friday. All other indices are trying to get back into an up trend. Friday's weakness is not significant unless it intensifies this coming week and threatens the 1168 low of the SPX.
Crude oil reached the 57/58 target and promptly sold off to below 53. It should have a bounce from here, but appears to be making an intermediate-term top, and perhaps even a long-term top.
As of the last posting, the gold commercial traders had again increased their short position, but since the data is over a week old, conditions could have changed since then.
The leading indicators (GE, XBD and BKX) are in gear with the market at this time and not giving either a positive or negative signal. The NASDAQ 100, however, has been showing positive divergence to the SPX for the past few days, and this is a short-term positive.
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 late 2005 or early 2006.
SPX: Intermediate Trend - The intermediate trend which started in August 2004 is undergoing a correction which has found support after retracing .382 of the move. In an up trend, any retracement which is less than 50% of the previous move is an indication of strength.
SPX: Short-term Trend - The short-term trend may have reached a low at 1164. If it can get above 1195, the move can extend to 1205 or higher.
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. Friday morning, right after the opening, the following was sent to subscribers:
Friday 4/8/05 Morning Comment (SPX hourly chart attached)
I thought that you might benefit from seeing graphically the current market position.
Please note that the oscillators at the bottom are both overbought and showing negative divergence. In the past, this has always signified that a minor top was imminent. The daily indicators are not there yet.
I have also included the Fibonacci retracement levels. The market has currently retraced to .382 and stands a good chance of moving to the .50 level right away. Note also the .618 corresponds to the projection which has been given, but this should come after a pull-back has taken place.
It is also worth mentioning that volume has been down for the past two days, although what is the new norm for daily volume has not yet been established.
P.S. The chart is as of yesterday's close.
Daily market analysis: If you would like to receive an explanation of how I arrive at buy and sell signals and sign up for a free 6-week period of daily comments, please let me know at firstname.lastname@example.org.
The structure of the current intermediate-term consolidation can be interpreted in several different ways, so we'll have to wait until it clarifies itself. We could have seen the end of the "a" wave of an a-b-c correction and the beginning of the "b" wave, but the important thing to realize is that the recent market action is much more likely to be a consolidation of the trend which started in August '04, rather than a major market reversal.
I had considered the possibility that the short-term trading cycle -- which normally runs 27-30 days -- might still be in the process of bottoming and was responsible for the pull-back on Friday after the SPX failed to go through 1195. However, I now believe that cycle bottomed last week and that the current weakness, which should extend into early next week, is caused by the 12-week cycle making its low. On 3/29 the SPX successfully tested 1164. That was the low of the 26-week cycle. I had mentioned earlier that there was a nest of cycles bottoming during the last two weeks of March and into the first week in April. If I am correct that the last of these cycles is near a reversal, then we should soon be in a position to extend the rally.
Looking at the current market action, there are a number of positive technical signs: 1) There was a valid Fibonacci projection to 1158 which was not reached. This is a sign of market strength. 2) By stopping at 1164, the SPX has only retraced .382 of the up trend which began last August. A 50% pull-back is considered a normal correction and we could still see the decline extend to 1144 later on. But since the correction has stopped well short of that level and if it does not resume right away, this would be another indication of strength. The NYSE had even less of a pull-back for the same time period. 3) The McClellan oscillator, which had been deeply oversold made an excellent recovery last week and went slightly positive. The NH/NL index dipped slightly into the negative but has since returned to positive. 4) The momentum indicators have confirmed the reversal and are not giving any indication -- so far -- that the rally is over. 5) On Friday's decline, the volume was considerably less than it had been during the rally from the low of 3/29.
The most likely target for the short-short-term decline which began on Friday is 1177 and this is likely to be reached early next week. But even if the decline extends further, the up trend will be safe as long as prices remain above 1168.
Looking farther ahead, the current intermediate correction should extend into late June when the 120-week cycle is scheduled to reach bottom. The last low for that cycle was March 2003. Late June will also be the 72nd week from the February 2004 top. That is one of the most important fractal time periods which govern market fluctuations. I will show you graphically how important it is in the chart section below. Because the 120-week cycle is scheduled to make its low EXACTLY at the same time, I strongly feel that this will be a low and that this is where the intermediate trend correction will end.
Next week should also determine the course of crude oil prices. So far, the often repeated projection to 57/58 has proven to be valid since, after touching 58+, crude had its sharpest and deepest correction since the trend turned up at 41. A bounce and top building action could take place in the next couple of days, but there are many signs that the upside momentum has stopped and that an important top may be forming. If oil breaks below 53 decisively, it could retrace all the way back to 41 before finding good support.
I also mentioned in previous newsletters that it looked as if crude was in the process of completing a 5-wave pattern which began at $17 in late 2001. This is also the approximate date when gold and the CRB index made their lows and the dollar its high. If this turns out to be correct, it will indeed be a very important top for crude, assuming that the dollar has already made its low. What is still not entirely clear is whether or not wave 5 for that time frame is complete.
There is no change in the analysis of gold and of the dollar which was posted in the last newsletter. It will take some time to determine for certain if the 8/9 year cycle which was illustrated has indeed topped out and is controlling the price of gold. This would mean that, conversely, the dollar is making a major low, and since all commodities are priced in dollars, it would have a negative impact on the price of crude.
Three charts are provided: The first one is a long-term weekly chart of the S & P 500 which shows the regularity of the 72-week rhythm. The pattern is so obvious that it does not require any further comment.
The second chart is that of the daily SPX. Please note how the oscillators at the bottom of the chart are instrumental in forecasting short term market turns. The most important of the three is the lower indicator which has a high degree of accuracy. Whenever it shows divergence, either positive or negative, it signals that a short-term trend reversal is imminent. The blank spaces were caused by making the dates fit. This chart requires two separate pages of data which can be superimposed and match perfectly on the computer, but when they are printed, the dates are slightly offset and need to be adjusted to provide the proper alignment.
You can see how the negative divergence clearly showed at the last market top and, although it is not quite as obvious, how it also appeared at the recent low. Most importantly, notice how the indicator has already exceeded its former high and is holding quite well in spite of Friday's weakness.
The middle oscillator is an overbought/oversold indicator. It became overbought in the middle of last week and signaled that the market was vulnerable to a pull-back. At this juncture, it does not have to retrace all the way to the lower part of its range in order for the up trend to resume.
The top oscillator is the RSI, a favorite momentum indicator which is currently neutral.
The numbers which appear on the chart represent a repetitive short-term fractal sequence that I am currently studying.
The third chart is a monthly chart of crude oil which shows the long-term wave pattern that has been mentioned above. Because this is a monthly chart and 58 did not trade until early April, the actual top does not appear on this chart.
The correction of the intermediate term trend which began in August '04 is well under way and should continue into mid-year.
The SPX ended its up trend at 1229 on the SPX, and the recent low at 1164 -- which was caused by a nest of short and intermediate-term cycles -- could mark the completion of the first leg of that correction. It will be important for market action next week to confirm this analysis.
Crude oil has reached its previously stated target of 57/58 and could be making an important top.