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 notunderrate 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 may have arrived for some indices, while others could still rally to slightly new highs.
SPX: Intermediate Trend - After reaching the stated bottom projection, the intermediate trend may have started a basing pattern which could result in a test of the highs.
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.
Since the decline came to an end on 5/24, all the indices have rebounded smartly from a short-term oversold condition. With two cycles turning up at the low, this was expected. We will soon see if this is only a bounce or the beginning of something more substantial for the near and intermediate course of the market. A short term decline followed by a rally is scheduled to take place during the next two weeks, and how the market performs during that time will tell us a great deal.
In spite of the sharp decline, all indices remain in long term uptrends and, so far, the decline is probably only a correction which was overdue. Some indices, such as the Russell 2000 and the NYSE Composite had become overextended and were making new historic highs practically every day. The NDX and SPX were not nearly as buoyant, and were showing evident signs of deceleration. They were the first to alert us that a correction was near.
The easiest way to assess the direction of a trend is to observe if the stock or index is making a pattern of higher highs or lows. Using this simplistic but effective analytical tool, the NYSE Composite is probably the best example of an index which is still in a long term, uptrend Let"s take a look at its weekly chart:
If this index is about to make an important top, it is obviously in its very early stages and will require much more "work at the top" before it reverses its long term trend.
On the other hand, the Nasdaq 100 is without question relatively the weakest index. While all other indices where making new multiple year highs, it remained confined to a trading range from January 2006 and broke below an important support level in the recent decline. Let"s compare its weekly chart to the NYSE:
By using Andrews pitchfork we can see that the decline has brought it to the lower boundary of its long term uptrend channel. To continue moving higher, it will have to overcome the overhead resistance which has been created by the distribution which took place between 40 and 43 over the past few months. If the 4-year bull market is beginning a topping process, this is not going to be an easy feat!
Another important index which needs to be watched closely because is has just begun to lag, is the Dow Industrials. As you can see on the chart below, its rally from 5/24 has been more restrained than the other indices. Whether it will catch up or take its place as 2nd weakest behind the NDX remains to be seen. It may be in the process of making a head and shoulders top but, since these patterns are highly unreliable and more often than not evolve into something else, this is too early to determine. The pitchfork median of an intermediate term channel was penetrated to the downside, but prices remained above the lower trendline of the long term uptrend channel.
Finally, looking at the following chart of the SPX, you may remember that in a past newsletter I mentioned that before this index could break out of its long-term uptrend, it had to start trading in the bottom range of its channel. As the chart demonstrates, for the past several weeks it was confined to the top of the channel and had nowhere to go on the upside. The recent correction has reluctantly brought it within the confines of the lower half, but it is already trying to rebound out of it.
For the SPX, as it is for all the indices, the low of the decline is probably the line in the sand which must be crossed before we can say that it has made a significant reversal.
After a correction of this magnitude in the overall market, it would be logical for a period of consolidation to take place followed by another attempt at making new highs which may or may not succeed, and this process has probably already begun.
The 20-week and 6-week cycles which were largely instrumental in causing the decline are now providing the buoyancy for the current rally. As mentioned earlier, we should get our first clue next week of how much more strength we can expect. So far, the rally from the low in the SPX is taking the form of an a-b-c pattern. The SPX is currently reaching the top of the "c" wave. On Friday it made a new rally high to 1290 shortly after the opening before trading sideways for the rest of the day, but it is projected to go slightly higher before making a retracement of a few days. If this remains an a-b-c pattern -- which is deemed to be corrective-- or if it develops into another type of corrective wave, it would tell us that we are not starting an important move to the upside at this time. A better appraisal of market strength will come towards the end of June when the 6-week cycle makes its next low. We will then be able to evaluate how much upward progress has been made by then, and how much weakness the bottoming proces engenders.
It"s obvious that the 4-year cycle is not pressuring prices as much this year as it has in the past or we would already be in a well-established downtrend. Some are already saying that it will turn out to be a repeat of 1986. During that fourth year of its phase the 4-year cycle bottoming process was confined to a sideways move and the long term uptrend resumed after it had made its low. The odds of this pattern repeating itself is probably nil. It may do something similar, but it won"t be the same thing because the odds of historical patterns repeating themselves exactly are practically non-existent.
The McClellan oscillator for the NYSE has had a very sharp rebound from oversold to overbought, thereby ending a string of declining tops and bottoms The same thing took place in the Nasdaq index but with less vigor, another proof that the Nasdaq continues to under-perform.
In the last newsletter I spoke of a 2-phase Point & Figure distribution pattern in the SPX. The first phase was completed at 1246 on 5/24. If the second phase is triggered, it would send prices down to the 1191 level. This would be nullified if the SPX makes a new high.
Because it is coming so late in its phase, it is becoming more and more probable that the 4-year bull market high (when it comes) will only bring a relatively moderate decline. I suspect that the driving force of the 12 and 10 year cycle is still very strong, and it will have to abate before we can make a really important market top similar to the one in 2000. This could still be several years away.
So far, the recent decline is beginning to look more and more like a correction in an uptrend rather than a longterm reversal, but it could also be the beginning of a topping action. It will take more time to evaluate which it is.
The two cycles which were largely instrumental in causing the decline into 5/24 are now helping the market to rally from a very oversold short-term condition. The nature of this rally will tell us what to expect in the next few weeks.