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 correction which began in mid-January on the SPX is ongoing and is now affecting all averages. The NYSE Composite and Russell 2000 made another all-time high in late January and early February respectively before joining the other indices on the downside. The Dow Jones Industrials was one of the first to correct, but has been relatively stronger in the past couple of weeks.
As you can see, there has not been very much cohesive action among the major averages lately.
Gold has begun to correct its recent sharp advance with its usual flourish, and crude oil stopped short of its former highs of $70 and was down sharply in the past few days. In fact, a number of commodities joined gold and oil on the downside, causing the CRB index to have its most severe retracement in many months.
The US Dollar found support just below 88 and is now ready to challenge the 91 level.
Current Position of the Market.
SPX: Long-Term Trend - All equity indices are at a critical juncture. The next few weeks could mark the top of the bull market which began in October 2002.
SPX: Intermediate Trend - The correction of the intermediate-term trend which began in October continues, but should come to an end toward the end of February.
SPX: Short-Term Trend - Beginning with the high of 1294, the short-term downtrend has been marked by volatility but continues to make lower lows. This is expected to continue for a while longer.
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 sign up for a free 6-week trial period of daily comments, please let me know at email@example.com.
Let's begin with an analysis of the daily SPX. As you can see on the chart which appears below, the boundaries of the correction are well-defined by a channel which, so far, encompasses two highs and two lows. The lower channel line is also the extension of the line drawn across the two tops made in December. But this pattern could be altered in the next couple of weeks by the cycles which are about to make their lows and which are shown on the chart as vertical red lines. These are not major cycles, but they can occasionally cause a sharp climactic low, and this could cause prices to drop to their next support line which is drawn as a second parallel to the top.
Note also how the rising trend lines join the descending trend line, converging in the vicinity of the second cycle low. This should prove to be a very strong support level which would probably end the correction Since the confluence of these trend lines also takes place near 1232 -- which happens to be a 50% retracement of the October-January uptrend -- it makes that level even more credible as a major support area.
Does the correction have to go to the end of the month and continue until the second cycle has made its low? Not necessarily. If prices retrace to anywhere near 1232 at the bottom of the first cycle (anticipated late next week or early the following), then that could mark the beginning of a new uptrend. In that case, the second cycle would probably only bring about a test of the lows.
Going back to the chart for a moment, you can see that the two oscillators are still in a downtrend and are not showing the type of pattern which is normally associated with the end of a correction. The MSO (modified stochastic oscillator) is a momentum indicator. In order to give a buy signal, the heavy red line would have to begin an uptrend, the thinner black line would have to overcome is prior top, and all this would have to take place as prices begin to rise and eventually move through the top of the channel. Once a low is in place, this can happen very quickly and will become quite evident.
The advance/decline oscillator below the MSO, is also not ready. The majority of the time this oscillator will show positive divergence of some sort at the bottom of a move, as it clearly did in December. At the October low, it was there also, but just a little more difficult to discern because it only became apparent on the test of the low, not at the lowest point. We won't absolutely expect positive divergence to take place again this time, but it will be a bonus if it does.
The next chart is a weekly chart of the SPX. It is always helpful to look at the shorter-term trends within the context of the longer term. It is even more clear on this chart that the SPX is going to have problems going much higher. The top channel (solid) line is providing major resistance. In addition, the dashed line-- which is the extension of the former channel, recently intersected precisely at the point where the SPX made its high. Both of these lines will still be there after the current correction is over and they will continue to limit any further attempt at moving much higher.
The weekly MSO, at the bottom of the chart, has begun to turn down and will have to be watched for signs of negative divergence at the next top (which would be an indication of a loss of upward momentum), although this seems to appear more frequently on the daily and hourly MSO, and not as much on the weekly.
Finally, we should have a look at the hourly SPX, another perspective which is also extremely valuable when analyzing the daily chart. he heavy blue lines represent the up channel and its subdivisions described by prices since October. There is one more line drawn across the October low which does not show on this chart. If you think of these lines as a staircase, you can see that the price have been walking down the stairs since the top as it works its way through the support level which appears (partially) on the left side of the chart. And they look as if they are about to take one more step! The thick red line at the bottom is drawn at 1246 and is the lower boundary of that support zone. If the SPX gets to that level quickly, it will effectively have penetrated all of the support and could easily break through it.
In the last few days, the index has bounced off the support line which connects the two tops at the left, but you can see that on the last bounce, the A/D oscillator (bottom) which had been in a strong, positive divergence position at the last low, is now in a very weak position. Note how the thin black line has remained below the thick red line on this last bounce. Unless this is corrected immediately by an extension of the current move and with very positive A/D, prices will take one more step down. And since we expect that the cycle lows are still ahead of us, perhaps as early as next week, you can understand why the odds strongly favor lower prices.
Projections: I have already mentioned that a 50% correction of the October uptrend would take prices back to about 1232. This would be confirmed by another Fibonacci projection if we break the 1246 level. But first we have to break it, and when we reach it, it is likely to give us one more small bounce before we get to our final destination.
SUMMARY: The correction which began at 1294 on the SPX could end as early as next week but, because a cycle is due to make its low at the end of February, it is doubtful that an uptrend could really get underway until early March.
This uptrend will probably have limited upside potential There is an unfilled count to about 1320 which corresponds to a zone of strong resistance at the top of the long term channel. That level could very well mark the top of the bull market.