In April I warned that there were important non-confirmations in place that had historically proceeded important down turns. I have also shown you several of my internal strength indicators and explained how they have been lagging. I have explained that both the non-confirmations and the poor internals were indications of changes that were in the making. Then, on May 29th I reported to you that the market was at a short-term low, but that trouble loomed. Well, there are more changes in the making with the grand finale slated for later this year.
On May 12th my Cycle Turn Indicator gave short-term sell signals and early the following week it gave intermediate-term sell signals. The cyclical phasing then suggested a bounce in late May. That short-term low was made on May 24th just as expected. The short-term cyclical phasing also told me that the May 24th low was ideally to be followed by one more down leg before a more significant advance began. As of the close last Friday, June 2nd, the market was still set up to move higher as the May 24th low was then still very much intact. On Monday, June 5th, this short-term positive setup was quickly shattered as the additional leg down that the cyclical phasing was calling for began sooner rather than later.
This brings us to today and we have now had the additional leg down that the cyclical phasing was suggesting. Based on the cyclical phasing we are now in the window of opportunity in which an intermediate-term bounce can begin. This will probably coincide with the typical "Summer rally." Unless things turn down much harder than what is now anticipated, this bounce should serve to retest the May highs and last long enough to erase many of the fears that this initial break may have caused. This rally should lull the unsuspecting masses back to sleep. If the market does not respond to the cyclical lows coming up, then there will be yet another leg down before the market is oversold deeply enough to launch the Summer rally.
Either way, based on the evidence at hand today, I look for the coming Summer rally to be a failed rally that will serve as a bull trap. Once that trap is sprung, all the things that have not mattered like the poor internals, the bearish Primary trend under Dow theory, the other important non-confirmations and so forth, should begin to matter in spite of the "Liquidity Factor." This is when things will really begin to get interesting. In the meantime, things are setting up to make this initial leg down look like the typical buy-the-dip correction that has been occurring since this mammoth rally separating Phase I from Phase II began.
In the first chart below I have plotted a chart of the Industrials in the upper window and the Transports in the lower window. In spite of the recent weakness, nothing has changed here. The Primary Trend non-confirmation, as is represented by the red line, continues to hold. All the while, the Secondary Trend confirmation, as is represented by the blue line, continues to hold as well. Until both the Industrials and the Transports break below their previous Secondary low points, there is still some hope of a recovery high. I also want to point out that cycles are not a part of Dow theory, but that cycles do offer a means of trend quantification that Dow theory doesn't offer. Based on those trend quantification methods, new highs at this point are looking less and less like a real possibility.
Below I have plotted my intermediate-term New High-New Low indictor along with the S&P 500. This is another internal strength measure and as you can see there has not been any improvement since this indicator broke down in February out of the 4th divergent peak since early 2004.
The same is also true of my intermediate-term Advance/Decline line as can bee seen in the upper window of the chart below.
But, based on the cyclical phasing, we should see yet another divergence peak by these indicators as things are beginning to shape up for a Summer rally. At this point I am watching my indicators closely to determine if this rally is about to begin or if there is going to be another leg down. Once the Cycle Turn Indicator confirms, then I will know that the Summer Rally is under way. But, once my indicators begin to roll back over, buyer beware and once the intermediate-term Cycle Turn Indicator turns down from the Summer highs, things should really get interesting as the change that is in the wind should begin to bear down. Yes, the "Liquidity Pump" will be in high gear along about that time trying to hold things together and perhaps they can soften things a bit. But, then on the other hand, perhaps not as we know from history that all manipulative efforts eventually fail.
So far this year, my outlook has been right on track in regard to the stock market, gold, the dollar and bonds. The June issue of Cycles News & Views is now available and in it I give the specific outlook for the rest of 2006. In this issue I also give the specifics on the 4-year cycle and the applicable statistical expectations for timing. A subscription to Cycles News & Views includes short-term updates three times a week, which include the ever so important Cycle Turn Indicator that is used to identify specific turn points. Visit www.cyclesman.com for subscription information.