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
For the past two weeks, the major indices have been in an upward crawling price pattern with little momentum, but nevertheless all registering new highs for the move which began in May/June. For the Russell 2000, this represents a new historic high and for the SPX, this is a 4-year high. The Nasdaq composite made a new 4-year high, briefly surpassing its January 2005 high, but only intra-day and not being able to close above it. The Dow Industrials continues to be the laggard and does not seem willing to join the others in their stratospheric ventures.
The performance of the breadth indicators continues to be just OK, with the new highs/new lows outperforming the A/D, but both showing intermediate-term divergence to prices.
Volume continues to be uninspiring.
Gold has been trading in a 30/40 point range for about six months now, while the US dollar has been consolidating its recent gains for the entire month of July.
Crude oil appears to be in the process of testing its mid-July highs.
Current Position of the Market.
SPX: Long-Term Trend - The bull market which started in October 2002 is now nearly three years old and it would seem unreasonable to expect a dynamic new up trend to develop at this time with the 4-year cycle low expected in about 15 months. However, the Decennial pattern has an unblemished history for the past 125 years, and if history repeats itself, the Dow Jones industrials and the S&P 500 will be higher on December 31st, 2005, than they were on January 1st.
SPX: Intermediate Trend - The current rally does not look like the beginning of a new trend, but rather the extension of the one which began in May.
SPX: Short-Term Trend - 7/7 marked the low of dominant intermediate cycles and prices have been in an up trend since, reaching a new high this past Thursday before being pulled down by a VST cycle Friday.
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.
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Market trends can be broken down into very long-term, long-term, intermediate-term, and short-term and should be analyzed both individually and collectively.
The very long-term trend consists of bull and bear market phases and is mostly under the influence of the 40-year cycle. The 1974 bear market marked the low of the last 40-year cycle, and if you look at a very long-term chart, you will see that prices have generally trended up since then, ending in a climactic top in 2000 with stocks grossly overvalued historically, and rampant speculation, especially in the Nasdaq. Two exceptions are the Russell 2000 which made historic highs this past week, and the Dow Jones Transportation average which made an historic high in March of this year, and appears to be poised to exceed that high. Nevertheless, it is obvious that the 40-year cycle should not be taken lightly, especially at this time when its next low is only 9 years away. Incidentally, this same cycle was mostly responsible for the 1929 market debacle.
Now, if you want to get an even greater perspective, you should be aware that the next 40-year cycle low will also complete the even longer 120-year super cycle. Should you care? You'd better because, generally speaking, all market trends from long term to short term will be influenced by this fact, and although no one can predict precisely what kind of economic re-adjustments (as well as social, geophysical and geopolitical) will take place between now and 2014, we can say for sure that it ain't gonna be good! Furthermore, the prevailing economic conditions of the next few years will also be influenced by the final phase of the Kondratieff wave which is usually marked by deflation it its last stages.
Am I preaching gloom and doom here? Not at all! I am only warning that a category 5 (or higher) economic hurricane is coming our way and one should take whatever appropriate action is necessary for economic survival. A number of commentators have been warning that current economic imbalances cannot continue and will eventually lead to economic disaster. This is all part of the cyclic nature of things in our physical, fractal universe, and it is as inevitable as the moon orbiting the earth or the earth orbiting the sun. At some point of the very long-term economic cycle imbalances need to be created that will eventually result in a spectacular crash. The prophets of doom and gloom will eventually be right. They were just a little early with their predictions.
Now for the good news! There is still plenty of time left to prepare for the yukky economic time frame that lies ahead. The long-term trend bull market which began in 2002 as a result of the 12-year cycle low and subsequently confirmed by a successful re-test in March 2003 (120-week cycle low) is in the geriatric stage, but still has enough energy to push a little longer and a little higher into the end of the year, and perhaps even into early 2006.
In the chart section below, the first chart is that of the S&P weekly chart which gives us a clear picture of the bull market. I have broken the trend into two long term channels, the first one representing its dynamic phase and the other its final stage which is not yet complete.
The second and final phase is depicted by a price channel which shows long term price deceleration, but which still has enough strength left to trade at the very top of its channel. It is nowhere close to challenging the bottom trend line.
For a better look at this second bull market stage, let's turn to the second chart, which is a daily chart of the SPX.
Same pattern here! The dynamic phase of that second stage began in August 2004 and ended in March 2005 -- an intermediate-term trend with a clear 5-wave pattern. After a correction into May, what is probably the final stage of the bull market began, but it has plenty of pep left! Note how it, too, is hugging the top of its channel and is still a long way from the bottom trend line which is presently over 100 points lower. There is no weakness there, only deceleration.
Let's now shift down to the next intermediate term trend which began in May 2005. For that we'll look at a blow-up of the daily trend. Here it is a little more difficult to discern the dynamic from the maturing trend of this time frame, but once again, we find prices at the top of their intermediate-term channel, reaching the top of that channel only two days ago! Where is the weakness?
The reason for that apparent strength is that the second stage which began in early July is being propelled by the 120-week cycle combined with the 72-week fractal. This combined lift should be enough to keep the trend from disintegrating rapidly over the near term, and could even cause prices to trade at new highs in the weeks ahead.
We'll shift down one more time and contemplate the trend which started on 7/7 with the bottoming of the two intermediate-term cycles mentioned above. For this we turn to an hourly chart and what do we see??? Same pattern once again; a dynamic stage followed by a maturing stage. Aren't fractals wonderful?
What all trends, beginning with the long-term trend, tell us is that there is deceleration everywhere, but that is not the same as weakness! All trends are at the top of their respective channels where they are meeting resistance. "Smart" money would not be buying aggressively here and this is one of the reasons why volume has remained low in the past few weeks. But neither is it selling aggressively. If it was, we would be witnessing downtrends instead of up trends. What we can expect from this point on, beginning with the short-term trend, is to see the various trends starting to reverse themselves. For most indices, the very long-term trend has already done this beginning with the 2000 top and the current bull market is nothing more than a test of the highs which will eventually fail.
Let's go back to the hourly chart for a moment. Has the short-term trend already reversed with Friday's action? Perhaps, but not necessarily. For one thing, there are valid higher projections conservatively ranging from 1254 to a 1286. These were triggered when the SPX exceeded its March high of 1229.11. It would not be surprising if the short-term trend reached 1254 or slightly higher before it showed its first sign of genuine weakness. The pull-back which took place on Friday was caused by a very short term cycle which should make its low on Monday morning. Whether we try for the 1254 level right away or a little later is unclear. At the very least, we should test the recent high of 1245, and if it is not surpassed, it will probably result in a deeper short-term correction.
The price pattern which normally precedes a reversal calls for price deceleration to take place. In other words, the top trend line of each price channel should first repel the advance and, after a correction, a new high should be made which fails to reach the top of the channel. Momentum indicators such as the RSI would signal an imminent reversal by exhibiting noticeable negative divergence when compared to the price action. You can see on the hourly chart below that the hourly RSI did not really make such a pattern on last Thursday's high. However, look at the final chart which is a 5-minute chart of the SPX, and you will see pronounced negative divergence in the RSI at the top. Knowing in advance that a VST cycle was about to make its low and seeing the divergence appear at the same time as the 1245 projection was reached, we were able to anticipate a decline into the lows of the cycle . The only needed confirmation was a break of the VST trend line.
Crude oil may be making an intermediate top here, and if it fails to exceed the recent high, this could result in a challenge of its intermediate trend line which is currently around 52/53. If this should take place over the next couple of weeks, it would help the SPX to achieve its 1254 objective.
I'll do an analysis of gold and the U.S. dollar when the chart patterns become more interesting.
The following charts have been thoroughly analyzed above, and do not require further commentary.
The price action that the SPX is currently making indicates that it is on track to fulfill, once again, the decennial pattern which calls for it to end the year at higher prices than where it started. Although the Dow Jones Industrials is lagging, there is still plenty of time for this to take place in that index as well.
All trends from short to long term are showing price deceleration, but no real weakness. In fact, by trading at the top of their respective channels, they are doing precisely the opposite.
Current patterns will first have to undergo a metamorphosis to suggest that the top of the bull market has arrived and that severe weakness lies ahead.