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 Three Weeks
After sustaining a two week drop from 3/7/05, equity markets established a two week base and most have been rallying since the 3rd week in April and have retraced just under 50% of their decline. The NASDAQ and the Russell 2000 have been the weakest in this correction, and they made their lows about a week later than the Dow, NYSE and SPX.
In my Closing Comment to subscribers on 5/2, I wrote: As of the close, there is no sign that this rally is over. I have valid projections (for the SPX) all the way to 1178, with the minimum being 1164/1166 and then 1170. We could stop at any of these. Thursday, the SPX did in fact reach 1178.62 and after an initial pull-back to 1167 tested its high on Friday and closed at 1171.35.
Since we have short term cycles bottoming next week, it is probable that there will be an extension of the decline. I will address this later on. But because the McClellan oscillator is still strong, 1178 is probably not the final high of the rally. Also, the Put/Call ratio closed at 1.05 on Friday. This is a reading which is not normally associated with a market high.
Oil is bouncing from a support level and should rally for a little while, but it is not expected to hold this level the next time it is tested.
The dollar was helped by Friday's employment report and is ready to challenge its recent high of 85. Consequently, gold has resumed its decline and is nearing its recent lows.
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. Unless significant weakness develops between now and the end of June, I have to assume that a top is still likely in late 2005 or early 2006.
SPX: Intermediate Trend - The intermediate trend which started in August 2004 is undergoing a correction. It has found temporary support after slightly more than 50% retracement. Structurally, it has made a two phase correction in the form of a zig-zag (5-3-5), thereby completing the A phase of the corrective pattern. It is currently in the B phase which could turn out to be an irregular flat (3-3-5) and which could end toward the end of May. The C wave would then begin the final stage of the correction to make a final low about late June/early July.
SPX: Short-term Trend - The short-term trend, which defines the B wave of the corrective pattern, is expected to continue up until just before Memorial Day.
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 sign up for a free 6-week trial period of daily comments, please let me know at ajg@cybertrails.com
What's Next?
Once again, we'll dissect the various technical components of the market and comment on each individually.
Cycles: The 120-week cycle and the 72-week rhythm are combining to make a low in late June. The intermediate correction is likely to last until that time and could conclude at 1098 (a 78.6% retracement of the former intermediate up trend which started in August 2004), but there will be intermittent rallies and declines caused by smaller fractals. For instance, there are two short-term cycles which will affect the market next week. One is scheduled to bottom on Monday/Tuesday, and the other about the end of next week.
Decennial pattern and long-term cycles: This was stated in the last newsletter and is worth repeating: There are some good reasons why I am still not convinced that we have just witnessed a long-term top in the markets.
One is that the 12-year cycle and the 10-year cycle are still early in their up-phase and should mitigate serious price weakness at this time.
Another is that the decennial pattern has been extremely reliable for the past century and it calls for the 5th year to make a new market high. Since this pattern is the result of the 10-year cycle action, and this cycle is only 6-months old, it is extremely unlikely that it would fail this early, especially since it is supported by the 12-year cycle which is only 3 years along in its up phase. This does not mean that this pattern is forever, and even if it survives this year, it may not in the next decade because of the long-term cycles which are due to bottom toward 2014.
A third, is that the current weakness is caused by the bottoming process of the 120-week cycle whose top waited until week 104 (CA) to form instead of week 60. This is known as right translation, and is a sign of long-term strength (the influence of the 12-year and 10-year cycles). I doubt that the next low of the of the 120-week cycle will carry the same bullish impact that it did in March 2003, because then it was greatly influenced by the 12-year low which had just taken place 5 months earlier. But it should still carry a strong bullish impact on prices when it bottoms in June.
An interesting article appeared on Safehaven, this week-end. You may be interested in reading it: http://www.safehaven.com/showarticle.cfm?id=3029
Structure: I have stated above that the current corrective pattern which began at SPX 1229 is probably an A-B-C flat. Recent market action appears to substantiate this analysis, especially if the current rally makes a new high into May 23 or beyond. The 1178 level that was reached last Thursday was probably the end of wave 3 of the C wave, and we are currently beginning wave 4.
Indicators: Three weeks ago, I wrote: In spite of last week's weakness, the McClellan oscillator is setting up for positive divergence. At the low of the first phase, it made a low -370 (this calculation may vary depending on the data provider) and in spite of the severe weakness of the past 3 days, the current reading is only -180. Since our first rally is probably due in the next couple of trading days, the reading will improve and make it less likely that we will get anywhere close to the lows of the first down phase. In fact, the McClellan oscillator was already in an up trend. and the lows in most of the equity markets came just a couple of days later. At this time, this indicator is still in an up trend and is showing no negative divergence to price action. I interpret this as meaning that this rally has farther to go on the upside. (See chart below)
My daily Up/Down Ratio (Buying/Selling pressure) indicator is confirming the McClellan reading. While the hourly has just given a short-short-term (1-5 trading days) sell signal, the daily oscillator, just like the McClellan, has become overbought and needs to correct.
The daily stochastic oscillator is also overbought indicating that a decline is likely.
The daily RSI for all indices are showing positive divergence to price. All, including those of the weaker Russell 2000 and NASDAQ, have overcome their former high, while the indices have not.
Projections: The SPX had a valid projection to 1124, but stopped short of it by 12 points. That was a sign that the downtrend was losing its momentum. As stated above, The rally had an interim projection to 1178 which was filled on Thursday and tested on Friday. I don't have a firm projection for either wave 4 or 5 of the B phase yet, but I would not be surprised if we challenged the 1192 level before this rally is complete.
Leading indicators: At this stage of the correction, none of the leading indicators is ready to lead the indices in a new up trend. This will come as we get nearer to the June/July lows. It is worth mentioning, however, that the NYSE index is the strongest of all the indices and has held up better than all the others in this correction It has retraced just a little more than .382% of its August-March up trend. This is significant, because the NYSE represents institutional money and it is, for the most part, clearly holding on to its positions.
Fundamentals: In the last letter I wrote: Although I normally stay away from discussing fundamentals, there are some which can greatly influence market action in the future. One is that, as a result of the current market weakness including that of commodities, the Federal Reserve may decide to stop raising short-term interest rates much sooner than is generally expected. Stephen Roach, the well-known economist with Morgan Stanley, has just voiced a similar opinion. He thinks that the Federal reserve may have concluded raising short-term rates with the 25% increase which took place lastTuesday.
Crude oil, gold and the dollar: Oil peaked at $58, justifying the projected target for a top. It has been declining ever since, but has just bounced off a support level below $50. This is not expected to hold the next time it is tested.
There are two more articles on Safehaven this week-end pertaining to Gold. You might find those interesting reading also. The second one is very sarcastic, but essentially correct. (Of course, I include these articles because they agree with my own views. Why else would I pass them on to you? ) Here they are: http://www.safehaven.com/showarticle.cfm?id=3025 and http://www.safehaven.com/showarticle.cfm?id=3039 If these articles are evaluating the future of gold correctly, then the dollar should have a very strong rally from its current levels.
Charts
The first chart which appears below is that of the NYSE. As you can see, the strength of this index is evident, especially when compared to the NASDAQ, which is the second chart.
The third chart is that of the McClellan oscillator, as provided by Stock Charts. The recent thrust into positive territory represents the upward penetration of a 235 trading day down trend line, and speaks for the strength of the long and intermediate term trends of the market. Also notice how the strong positive divergence pattern which preceded the end of the decline by a few days is not matched by negative divergence at the current market top. This implies that there is no deceleration taking place and that this rally has further to go.
SUMMARY:
The correction of the intermediate trend which started in August of last year (wave 3 from March 2003) and which reached its peak in March of this year, is about half way complete. Its structure appears to be an A-B-C corrective pattern in the form of a flat and it is expected to make its final low in late June, early July.
The B wave which started on March 20 on the SPX looks as if it is just starting wave 4 of a 5 wave pattern. It should challenge the 1192 level by the end of wave 5.
All the indicators seem to agree that the rally is not complete, and it would be very unusual if they turned out to be incorrect.
