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 top of the 4-year cycle bull market which started in 2002 has most likely arrived, but it will have to be confirmed by subsequent market action.
SPX: Intermediate Trend - The last newsletter stated: 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. Obviously it should have said "in the early part of this month." The intermediate trend is now down.
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 firstname.lastname@example.org.
From a timing perspective, it would be difficult to make a more accurate forecast than was done in the last newsletter, with the time slot for a top given at between 5/8-12.
Credit for this near perfect timing goes to a very astute student of Gann who lives in England, as well as to a friend who is an Elliott Wave specialist and who correctly identified the terminal pattern which was taking place. Both of their perspectives were of tremendous assistance in helping to confirm what my own work was telling me. As mentioned previously, the base that the SPX had formed in October had a Point and Figure count to 1323, and cycle analysis had forecast that a reversal was imminent.
What I had not anticipated was the viciousness of the sell-off which took place. I had expected a more moderate and gradual decline. As it started, I gave my subscribers a number of levels where the SPX could have found support, providing that these coincided with the cycle lows. For instance, a more gradual pull-back could have reached the 1280 support level around this time, and rebounded from there. Instead, we kept on dropping and have now reached the very last projection zone: 1253-1269. Since we have also arrived at this level in the time frame where the cycles should be making their lows, we should be very near a reversal point. The best case scenario is that this will take place next week, probably in the vicinity of 1253. The 20-week cycle may have made its low on Friday, but the 6-week cycle should bottom next week, probably in the middle of the week. Assuming that is correct, then what?
First of all, the recent market action points out that a major shift in market psychology has taken place practically overnight. The 20-week cycle could not, on its own, bring about this type of reversal. Therefore, it is likely that the 4-year cycle has finally taken control and that we have seen the top of the 4-year cycle bull market which began in October 2002. But this will require confirmation. Breaking below 1280 was an indication that we had started an intermediate downtrend. Going below 1245 would be even more conclusive and would probably indicate that the decline will not end until October/November 2006.
One of the reasons that I had given for expecting a more moderate decline, was that several indices were making historic highs practically every day and showed no sign of deceleration. But look at what has happened to them in the past few days! They sure fooled me and reversed their upward course on a dime! Now that hedge funds are controlling an increasing share of the market, this is the action we can probably expect when they exit en masse as they appear to have done here.
So what happens when the cycles turn up? Probably not too much. The basic market process is: accumulation, uptrend, distribution, downtrend. The amount of intermediate term accumulation which took place in the SPX at the October bottom was exhausted at 1326. As we made the ending diagonal pattern of 3 distinct phases of upward deceleration on the SPX, the last phase produced a Point and Figure distribution pattern which can be broken down into two separate sections with the first one giving us the 1253 projection. However, the entire phase of distribution which took place between April 17 and May 10 gives us a count down to 1191. So I have to assume that it is logical to expect a minimum decline to that level before we reach some sort of significant bottom. And if we get there relatively quickly, that would only be an intermediate-term bottom. The long term, 4-year cycle bottom could take the SPX down as far down as 1050. With this potentially ahead of us, how can we expect more than a holding pattern in the near future?
Before we go any further, let's take a look at a couple of charts. We'll start with an hourly of the SPX. I want to show you what I am talking about when I mention phases from which I derive Point and Figure counts.
What I have shown here, is the last wave of the ending diagonal -- wave 5, which is composed of an a-b-c pattern. Ellioticians are still arguing as to whether the top came at "c", or if the rally on Fed decision day was a truncated 5 that "should" have gone into the low 30's! That's academic. We are more concerned about where we go now. The best clues come from the counts given by the two sections depicted on the chart. Since we are approaching the Phase I count of 1253 and the cycles have practically arrived at their ideal time destination, this is where we should look for a reversal. What of Phase II??? We'll discuss that a little later on.
Remember the following charts from last week which depicted the negative divergence between the SPX and NDX, and made the case for being very close to a top?
This is what they look like this week:
Has anything changed? Absolutely nothing! The NDX is still weaker than the SPX and until that changes, we can pretty well assume that we have not made a low of consequence.
You might also note that on this short term chart of the SPX, prices dropped progressively lower and lower in the channel from the October bottom. On the NDX, the same thing happened, but in a much longer and more important channel, going back to April. This is another way of saying that the NDX is leading the SPX down over the course of the longer term trend. That can't be positive for the intermediate term future of the stock market, and it confirms what the top projections are saying: this low won't be the end of the current decline, but only one phase of it.
How much of a reversal can we get here? We'll know better when the decline is complete and a base has been established from which we can derive a Point and Figure count. This is strictly a guess at this time, but I would say about 40-50 points is feasable.
And then what? I will touch on this lightly because we'll have more data to work with over the next two weeks. Eric Hadic, a cycle analyst that I respect highly, foresees a continuation of the decline into the 3rd week of June. Since he does cycle work which is far more comprehensive than mine, I will be looking very closely at the market action to see if it confirms his prognosis. Could this mean a brief rally and then another stampede to 1191 by then??? Considering what just happened in the course of a few days, it is certainly possible that we could do the equivalent of the recent decline in the course of the next month. If we did, it might just convince me and a few others that we have indeed seen the top of the 4-year bull market.
Please note that I keep saying "the 4-year bull market". The decennial pattern and other factors tell me to proceed with caution in joining those who are calling the resumption of the "secular" bear market at this time. I am not ready to do that. Ask me again in 2009!
Next, I give you a snap-shot of the stock market two weeks ago:
Finally, one set of indicators that had everyone fooled at the top were the sentiment indicators. Based on what they were forecasting, investors, investment advisors and put and call buyers were far too bearish (a market positive) and this kind of a decline should never have happened. Well, they are even more bearish now. So it will be interesting to see what happens next!
There is a high probability that the 4-year bull market came to an end for the SPX, but it remains to be confirmed.
It is also probable that this drop was only one phase of at least a 2-phase decline which will eventually take the SPX to 1191, with potentially more to come later!