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Market Sentiment At Its Lowest In 10 Months

Market Sentiment At Its Lowest In 10 Months

Stocks sold off last week…

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Turning Points

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

Current Position of the Market.

SPX: Long-Term Trend - The bull market top may still be a few weeks away.

SPX: Intermediate Trend - The uptrend which began in October should come to an end in the early part of next month as a result of the 20-week cycle bottoming in late May. 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?

In January, the SPX reached 1295 and it closed at 1326 this past Friday, a net gain of 31 points in 16 weeks. The Nasdaq 100 reached 1761 in January, and it closed last Friday at 1714, a net loss of 47 points in 16 weeks! If an analyst were to base his future market forecast strictly on these two indices, he would have to conclude that a top is at hand, that a reversal will soon take place and that an important decline is about to begin.

The problem is that the other indices do not agree with this scenario. The Russell 2000 and the NYSE composite have become raging bulls, and have been making new historic highs practically every week along with the transportation index which does not seem to care one iota about the high price of oil. Even the Dow Industrials are close to surpassing their 2000 peak!

A few weeks ago, based on the performance of the two weakest indices, I began my newsletter with the heading: A Bull Market High? But week after week, I could not get a confirmation that an overall top was forming, Therefore I had to conclude that we were not there yet! So, exactly where ARE we?

I had thought previously that when the move which started in October came to an end, this would also mark the top of the bull market. I no longer believe that this will be the case. I now think that, although the October trend may come to an end next week, the bull market high will take place at a future date.

In the last newsletter, I wrote: The first sign that the bull market is coming to an end is when it (the SPX) drops into the lower half of its channel (up channel from August 2004). This, obviously has not yet happened, but I still believe that a pull-back is starting as early as next week, although it not yet clear how much of a pull-back it will be. An accurate projection cannot be made until a top is in, and the short-term move which started last week has not yet exhausted itself.

Why should there be a top next week? Let's dissect the market technically and consider the evidence:

  • Structure: According to the Elliott Wave theory, the pattern which began in October is coming to an end in the form of an ending diagonal and requires only a few more points to be complete. Since this is a termina pattern, it should put an end to the advance. HOWEVER, since some pieces are missing for this to be a bull market top, it is very likely that the so-called "terminal" pattern will expand into a larger wave pattern.

  • Gann: W.D. Gann is reputed to have said that "Time is the most important factor among all things!". If this is so, then the Gann time interval coming next week -- 5/8-12 -- cannot be ignored. It fits in perfectly with the ending Elliott Wave pattern described above.

  • Cycles: The current cyclic configuration also reinforces the probability of a near-term top. The 20-week cycle is due to make its low about 5/20, and this low will be assisted by a short-term cycle low.

  • Bradley Sideograph: This indicator may not be familiar to everyone, but an explanation of it is readily found on the internet if you are interested. It gives an indication of when market turns may occur, but it neither gives the direction, nor the amplitude of the move. The two dates of interest that lie directly ahead are: 5/11 and 5/18-20

  • Point & Figure and Fibonacci projections: For the SPX, there are a number of short-term projections which converge between 1324 and 1334.

  • Divergence: The one notable negative divergence is between the Nasdaq 100 and the SPX. It has now existed for several weeks and, because of its historical record, it would be surprising if it turns out to lack significance. Another negative divergence which has also lasted for several weeks is between the NYSE Composite and the McClellan Summation Index.

Because of the strong showing by the A/D on Friday, it will take a few days to develop negative divergence in the short-term indicators, so a top would probably not occur until about mid-week and would be more visible on an hourly chart.

These several factors indicate that the time has arrived for a "moderate" correction. Why not the top of the bull market?

  • The SPX refuses to leave the top of its long term channel, and this is a sign of strength.

  • There is too much upside momentum in the NYSE, Russell, and the Dow Industrials and Transports.

  • Although the 20-week cycle can -- under the proper conditions -- bring about a significant reversal, since it will be turning down only about 2 weeks from its low, it will not have time to develop a great deal of market weakness.

  • One indicator that I have neglected of late because I have found it to be occasionally misleading is the sentiment index. There are several measures of sentiment and what they have in common currently is that they are not indicative of a major top! When this is added to the mix, it argues for a delayed bull market top.

The Fed meeting next week brings an element of additional uncertainty to the near-term. The stock market has reacted positively every time there was a hint that the Fed would pause in its rate raising cycle. If it does, it will be interesting to see if the evidence that next week should be a short-term top turns out to be correct.

Below are some charts that will offer a graphic view of some the comments made above:

The first shows the current EW labeling, the previous lows of the 20-wk cycle, and how the SPX continues to trade in the upper portion of its long term channel.

It also shows how the two previous peaks in the A/D oscillator corresponded with short-term market tops which resulted in short-term declines. Is the current peaking of this oscillator forecasting another decline ahead?

The second shows the divergence between the NDX and SPX which has now gone on for many weeks.

The third is a chart of the Bradley Sideograph with market turn predictions for 2006.

The final chart is a comparison of the SPX with the three strongest indices -- all of which are making historic highs -- since the October low. There is no sign of long-term weakness developing here.

SUMMARY: There are good reasons to expect a reversal as early as next week and a decline into the 20-week low which may put an end to the trend which started in October.

There is little evidence that this will also be the end of the bull market.

 

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