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
Most of the indices were in a corrective mode in the past two weeks although, at the beginning of that period, the Nasdaq and the Russell 2000 managed to eke out new highs before pulling back. The Dow Jones Industrials traded at a fractional new intra-day recovery high this past Wednesday, but the star performer was the NYSE composite index which continues to forge ahead and made another historic high as late as this past Thursday.
Volume has picked up slightly and it has to be considered good for this time of year which has earned the name of "Summer doldrums". The A/D registered very negative numbers a week ago and recovered somewhat this past week, but the McClellan oscillator has not yet been able to get back above the 0 line. The new highs/new lows index remains positive.
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 intermediate trend which began in May has entered a corrective phase. So far, there is no evidence that it is anything more than that.
SPX: Short-Term Trend - 7/7 marked the low of dominant intermediate cycles which took prices to a high point on 8/3. This has been followed by a mild but volatile decline.
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?
This newsletter is written every other week and is published on the week-end. On alternate week-ends I write a report which I send to subscribers. I am reproducing here portions of the last report dated 8/7, because they still apply today.
In the last newsletter, I showed how all trends were at the top of their respective up-channels where they were meeting resistance and were unable to make much progress. After reaching a short-term projection at 1245, the SPX has begun to correct. So far, that's all it is: profit-taking correcting an overbought condition.
The current cycle configuration does not suggest that this is the beginning of a serious decline. The next intermediate cycle low (the 12-mo cycle) will be around October 1st. In the past two years this cycle only caused a 2-3 week decline of approximately 50 points. Based on this performance, it seems to be a little early for it to have topped out, although one cannot expect an exact replication of time and price from one year to the next. This would suggest that the odds favor higher prices into late August or early September. Let's look at the underlying technical condition to see if we can get some clues.
The most negative indicator is the McClellan oscillator which topped in early June and has been in a declining channel since. The action of the past two days has sent it to the bottom of this channel and created an oversold reading. This indicator alone tells us that we need to do a little work before we can make an attempt at resuming the up trend.
By contrast, the daily BSP index has corrected an overbought position and is now neutral. No real weakness there at this time.
The daily RSI has quickly gone from overbought to neutral.
These three indices address the three most important technical aspects of the stock market: Breadth, buying/selling pressure, and momentum. Their collective reading gives a more reliable interpretation than each one individually. Right now, they support the conclusion that the market is undergoing a normal correction and is not at the beginning of a significant decline.
Not a great deal has happened in the past week to change last week-end's analysis. It still looks as if the market may have one more up move to reach its 1254 projection, but it has to do it soon, before the 12-month cycle mentioned above takes over.
The McClellan oscillator has rallied from an oversold condition and is trying to get back into an up trend, but it is still negative. It will require several days of strong daily closings to get it above its current intermediate down trend line which is presently at about +150. Even if it did, this would not indicate that it is the beginning of a new intermediate up phase. What will probably happen is that it will continue to improve and become positive, but fail to reach new highs, thereby setting up negative divergence to prices as the market meets it final target.
The other breadth indicator, the NH/NL index has remained positive for 12 consecutive weeks but has lost momentum in the past few days since the correction began.
My daily Buying/Selling pressure indicator, like the market, is in a corrective phase but has not yet signaled that a top is in place.
After showing some mild negative divergence at the top, the daily RSI is, once again, in gear with the price pattern, giving a neutral reading.
It is always helpful to put the daily indicators under a microscope and look at the hourly readings. Here again, the BSP index and the RSI have gone from an overbought to an oversold condition and, for the past week, they have hovered around neutral.
The Nasdaq 100's relationship to the SPX is always worth tracking. Right now, the daily patterns have remained slightly positive, but on hourly charts, the QQQQ shows a slight negative divergence with the SPX.. I interpret this to mean that the correction has a few more days to go.
The daily charts of these two indices will be shown below. What is mostly apparent is that both indices are still in strong intermediate term patterns and not ready to challenge their up trend line. The Nasdaq 100 may also be clarifying the wave structure, indicating that if this is an impulse wave, it is currently in a wave 4, with a wave 5 to come.
Taking all of the above into consideration, and considering that a very short term cycle is due to make its low about Wednesday, this would be the logical point for the short term correction to end.
Another chart that will be shown below is the weekly chart of the Securities Broker Dealer index. This is one of the leading market indicators and until it shows that it has topped out, it is not likely that the bull market high has been made. Currently, it is still in a very strong up trend, having made an historical high a month ago and challenging that high last week.
Finally, the daily chart of the NYSE index, also shown below, represents one of the broadest based indices. It too made an historical high last week and shows no indication of topping out just yet. My EW interpretation of the pattern which began in June is that this index may currently be in an incomplete wave 3, with a 4 and 5 to go.
Gold should be getting close to the top of its rally. The commercial traders increased their short position significantly last week, and since bullion has now rallied to the top of a broad consolidation band which goes back to last February, it is likely that it will now begin to retrace one more time. The only question is: how much of a retracement? Does the consolidation represent a re-accumulation phase or a distribution phase? The next pull-back might provide an answer.
The contra (gold) trending U.S. dollar looks as if it may be approaching a wave 4 low in the up trend which began last March. The next week of trading will tell us more.
Oil is probably the most talked about commodity today. There seems to be no end in sight to its up trend. According to some analysts, this is "irrational exhuberance" considering the present level of world supplies, but one cannot argue with prices. There is never a direct relationship between fundamentals and technicals. Human emotions make sure of that.
From a technical point of view I had estimated that, based on Point and Figure analysis, oil could reach about $65, but it has already exceeded that target. However, since it is trading at the very top of an intermediate channel that began forming in December 2004, it should meet some resistance at its current price and begin retracing.
Charts
Pertaining comments about the charts included in this section have been made above. In addition, please note that a feature that they all have in common is that every index is trading in the upper half of its up channel. This is a sign of strength.
SUMMARY:
My analysis tells me that we have not yet reached the top of the bull market. In fact, it is probable that we have not yet even reached the top of the intermediate trend which began in May/June.
