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 Bull Market Top?

A Review of the Past Two Weeks.

More price deceleration was evident in the past two weeks. Even the two super-charged indices, the NYSE composite and the Russell 2000 although they briefly poked their heads into all-time high territory, immediately fell back sharply. At the other end of the spectrum, the Nasdaq 100 ( largely influenced by the weakness in the Semiconductor Sector Index) came within a fraction of its early January low last Friday -- on the same day that the Dow Industrials was up 102 points.

The overall condition of the stock market is perhaps best graphically represented by the New York Stock Exchange Composite new highs/new lows cumulative index, which is shown below (courtesy of StockCharts). It has flattened out, but has not yet rolled over.

Crude oil has now been trading in a limited range for about 6 months.

Gold continues its consolidation, and the US Dollar is flat-lining around 91.

The Commodity Index had a sharp retracement in the past week and appears to be entering a more protracted correction.

Current Position of the Market.

SPX: Long-Term Trend - Equity indices are in the process of ending the bull phase which began in October 2002 and are about to begin a retracement into the 4-year cycle low which is due in October 2006.

SPX: Intermediate Trend - The intermediate-term trend which began in October may have topped out at 1297, but another 2 or 3-week rally is still possible and even likely.

Analysis of the short-term trend is done on a daily basis with the help of hourly charts. It is an important adjunct to the analysis of daily and weekly charts which determines the course of longer market trends.

Daily market analysis of the short term trend is reserved for subscribers. If you would like to sign up for a FREE 6-week trial period of daily comments, please let me know at ajg@cybertrails.com.

What's Next?

Evidence is accumulating that at least some indices have reached the top of their bull market. Others are still trying to decide. This is due to the current cyclic configuration which is not affecting each index exactly in the same manner. There is no question that the major cycle influencing prices currently -- the 4-year cycle is now beginning to exert more and more pressure on stocks, and this will continue until October or November of this year. Against this pressure, the smaller cycles have a diminished effect when they make their lows and begin their up phases, and they get an assist on the downside when they turn over.

Let's get back to basics and review how the stock market progresses in time:

1. The long term trend, which is under the influence of longer cycles, rules over the shorter trends.

2. The smaller cycles also have their effects, and these result in a fractal structures whereby all patterns are made up of smaller patterns and are parts of larger patterns.

3. The net result is that longer term uptrends consist of a series of higher highs and higher lows, and longer term downtrends, lower highs and lower lows.

With the 4-year cycle beginning to roll over, what has been a succession of higher highs and higher lows into the bull market top will, at some point, begin to shift to a series of lower highs and lower lows, but this has not yet happened.

Not all the indices move exactly in concert. This is both good and bad! The bad part is that it can be confusing, especially at a longer term top or bottom, because you don't know which index to believe. The good part is that one index appears to consistently be the leader in this process. I discussed this in the last newsletter and showed graphically how the Nasdaq 100 had clearly (to me) topped out and begun a downtrend, while others were still in their final stages of an up trend.

Getting back to cycles, the 36-week cycle is an important player in the overall process right now. This cycle is the half-span of the 72-week cycle and it can forecast either a high point or a low point when it comes to the end of its phase. Next week will be the 36th week since its last low and, based on the performance of the Dow Industrials and other indices in the past week, it look as if it may be making another low.

For whatever reason, the Dow normally appears to pin-point the ends of cycle phases more clearly than other equity indices. On the DJIA hourly chart which appears below, you can see that after a 3-week decline, the Dow has begun another uptrend. If this marks the low of the cycle, it's now a matter of following through, but since it is short-term overbought, it should consolidate before it does. The momentum oscillator is at the top of its range.

More evidence in the form of the advance/decline ratio will be shown later. But we don't have to decide just now... the action of the market will decide for us by next week. Some of the weaker indices could wait until then to make their cycle lows,

Is it important to decide if the 36-week cycle has made its high or low? Only for the short term because a low could hold up the decline for a couple more weeks and frustrate the early bears even further. Judging by the latest SPX COTs, the commercials continue to accumulate short positions. But, as you can see from the graph below, they have been doing this since last December, so their timing is not precise. Nevertheless, they will be right eventually, and probably sooner than later.

There are other, shorter-term cycles which also suggest that the very top is still a few weeks away, but stocks are not likely to soar to new highs. Instead, they should continue their pattern of recent weeks which is illustrated on the weekly chart of the SPX.

The daily chart of the Nasdaq 100 (QQQQ) which appears below clearly demonstrates that it is the weakest of the equity indices and is already in a downtrend.. Since it leads, this does not bode well for the immediate future of the stock market. There are several significant features to note in analyzing the following chart, all of which are encapsulated in red circles:

1. There has been an unmistakable climactic "blow-off" which frequently takes place at the end of an important trend. This was referred to by old-time traders as "hypodermics", a very apt analogy to an old medical practice whereby dying patients were given a last minute hypodermic stimulant to revive them, just before they took their last breath. This is characterized by a rapid rise to a new high after a protracted advance, immediately followed by a price reversal and the beginning of a protracted downtrend. If you are not convinced, take a look at the daily charts of Google and Yahoo during the same time period.

2. Note that this was presaged on the momentum oscillator with noticeable negative divergence (-).

3. Now let's turn to the present and note that on Friday, the price may have found support at an important trend line, one which marks the bottom of its rising price channel since last May, as well at a previous support level marked by a red horizontal line. Also notice the green + sign below the current reading of the oscillator. This is an indication of positive divergence: one which normally precedes a trend reversal. This would signal that the index may have found at least temporary support and is ready for a bounce, another indication that the 36-week cycle has made or is making its low.

Let's now analyze the SPX by contrast. First, the weekly chart:

Here I want to call your attention to the area in the box which represents the weekly price trend for the past 4 months. Notice that it lies in the upper portion of two distinct channels. The larger one, outlined in blue, represents the price trend of the second phase of the bull market, going back to August 2004, and the smaller one, outlined in green, a component phase which began in July 2005.

It becomes immediately obvious that after the sharp rise which started in October of last year (after the 12-month cycle low), very little has happened in the past four months, and even less lately. Prices are less and less able to stretch to the tops of the channels, and this is a sign of deceleration -- a long overdue effect of the 4-year cycle down phase. But the fact that they are still confined to the upper portion of their up channels and have not been able to reverse into a downtrend is testimony to the strength of the market, especially this far along into the phase of the 4-year cycle. Until the higher red horizontal line is penetrated to the downside, the market is still in an uptrend. If my hunch that the 36-week cycle is just now coming into its low, then we are looking at similar action at least into the end of the month.

If there is another short retracement into next week, there are two trend lines crossing about 1260 which will offer temporary support.

Next and last, we'll look at the daily SPX. It's just a close-up view of the weekly, but you can see more clearly where the support lies if the cycle low for this index should come next week.

The momentum indicator has turned up, but it needs to follow through by crossing the heavier red line in order to give a buy signal, in conjunction with the upward penetration of the shortest price downtrend line.

The A/D oscillator's steep decline into oversold territory is probably additional evidence that this was caused by the 36-week cycle low discussed above. Ideally, we would want to see one additional pull-back in prices while this indicator remains at a higher low, thereby creating positive divergence. If this happens, there is a good chance that we'll get a final move above 1300.

The near-term picture should become more transparent by the middle of next week.

SUMMARY: The bull phase of the 4-year cycle which began in October 2002 has most likely already come to an end for the Nasdaq 100, but there could remain one more small leg up to new highs in the other indices before the decline into October begins.