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 rally which began on 5/13 accelerated sharply upward in the first part of last week, with the NASDAQ leading the way and the NYSE struggling to keep up and clearly the weakest of all the indices. The Dow Industrials and the Russell 2000 did a little better, but most of the strength is confined to the NASDAQ. This has implications which will be discussed later in What's Next?
By the end of the week all indices began to lose their momentum and the volume dropped off sharply. In fact, the NYSE volume was never really heavy during the rally, but the advance/decline had enough positive days to send the McClellan oscillator within a fraction of its recovery high. The NH/NL index performance was not impressive.
In short, the technical readings were mixed enough to be used by both the bulls and the bears to argue their case. Next week should decide whether this rally is a flash in the pan or if it has some substance.
Gold and crude oil continued their decline while the US dollar made a recovery high.
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 -- a prospect which does not seem likely -- 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 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) which completed the A phase of the corrective pattern, and it is currently in the B phase which could end toward late May. The C wave would then begin the final stage of the correction to make a low 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?
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. There is still plenty of time for the SPX to make new lows after the short-term
Top (which is scheduled for the end of May) is complete. However, it is probable that the NASDAQ will hold its 4/29 low. This index has shown great relative strength to the other indices, and since it has a history of leading, its current action not only suggests that it is likely to make a higher low at the end of June, but also that the equity indices have not yet reached their long-term tops.
Since history also suggests that the 5th year of the decennial pattern is normally a strong year, the relative strength of the NASDAQ should be considered normal at this stage of the market position.
Also, as stated repeatedly before, the 12-year and 10-year cycles are still in their up-phase and are countering the downward influence of the 4-year cycle which is past its mid-point and which is expected to make its low in October 2006.
Some have pointed out that there are longer term cycles -- such as the 144-year cycle -- in their down phase which supports the view that the March high should be the top of the bull market. For that matter, the 120-year cycle (which is scheduled to make its low in 2014) is also in a down trend and, as one of the most dominant long-term cycles, it will likely bring economic havoc in the last few years of its decline. However, just because these cycles have reached their peak, it does not mean that they will automatically bring the market down right away. After all, they are already way past their mid-point.
Cycles represent the fractal composition of the stock market and relative to some even longer cycles, the influence of the 120 and 144-year cycles is minimal. The 360-year cycle may still be in its up-phase, and the 36,000 year, and the 36-million year cycle! Cycle analysis is tricky! You have to consider each cycle as part of a whole, not as the most dominant entity. At some point of history, a very long term cycle is likely to mark the end of civilization and probably of our solar system as well, but since that prospect is not immediate, we don't have to worry about it just now.
Another misconception about cycles is that their length can be affected by external factors. The periodicity of a cycle is pretty much fixed, although it can vary slightly from an ideal norm. But this variation is intrinsic to the nature of cyclic energy and not caused by external forces. The cycle is itself the cause of the manifestation, just as the moon's gravity causes regular tides, and the tides have no influence on the moon.
Structure: The corrective wave which began in March continues to progress with the B wave of an A-B-C pattern almost complete. This B wave started on 4/20 for the SPX and is nearing the end of a 5-wave pattern.
Indicators: The McClellan oscillator made a short-term double top last week by coming to within a hair's breadth of its former recovery high. In spite of the obvious strength, this still represents negative divergence since all indices except of the NYSE made decisive new relative price highs. The negative divergence could be even more obvious if the market pulls back for a couple of days with the McClellan retracing as well, and if slightly newer highs are made by the indices towards the end of next week and the McClellan stays well below this past week's high.
Two weeks ago I wrote that the Up/Down Ratio (Buying/Selling pressure) had become overbought and needed to correct. It has not only done so, but it is refusing to confirm the new high in the indices. The negative divergence is glaringly obvious in both the daily and hourly indicators. This is a leading indicator and its pattern normally precedes a top by several trading days.
The daily and hourly RSI for all indices have gone from showing positive divergence with price to simply being in gear with it. Since there is no negative divergence showing just yet, the market is likely to make a new high to the projected level given below.
Projections: In the last newsletter, I wrote: 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. The market strength of the past two weeks has vindicated this assessment. Current projection based on Fibonacci ratios call for a target zone extending from 1187 to 1198. We have already reached the middle of that range, and after a pull-back, the SPX may try for the upper limit.
Downward projections will be made after the short-term top is complete.
Leading indicators: The Banking index and the Broker index are only in gear with the indices, but GE has already reached its highest price level since January and is clearly leading the market upward. The same can be said of the NASDAQ.
Crude oil, gold and the dollar: Both oil and gold have extended their decline this past week. However, bullion commercial traders have been covering their shorts for the past three weeks. This means that they are expecting gold to rally.
Conversely, the US dollar is very close to a short term projection of 87 which corresponds to reaching a down trend line, so it is probably nearing the end of this phase of its rally and will undergo further consolidation.
Charts
The first two charts are the same as those shown in the 1st newsletter. They are intended to point out the increasing positive divergence between the NASDAQ and the NYSE.
The third chart is an hourly chart of the SPX which shows the deceleration that is taking place in an overbought RSI. The lower indicator is getting ready to break its up trend line after showing negative divergence to the price action.
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 nearing the top of the B wave of a probable A-B-C pattern, and it is expected to make its final low in late June, early July.
The leading hourly indicators are already calling for a top of the up trend which began on 4/20, but others suggest that, after a brief pull-back, the top will be made toward the end of next week.
