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 been made.
SPX: Intermediate Trend - The intermediate trend may have made its low last week, or will do so within the next two weeks.
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 email@example.com.
A LOT has happened since the last newsletter was published 2 weeks ago, most of it negative for the market as the SPX tumbled another 70 points into last week's low before rallying. And what a rally it was! 39 points in two days! That could only have happened under the perfect conditions of an options expiration period into which massive put buying and naked call selling had undoubtedly taken place. Add to that the fact that the COTs had covered most of their short positions just prior to the rally (as indicated by the latest readings which, although reported on Friday, are actually as of a few days earlier!!!), and we had just the right staging for explosive, spontaneous fireworks!
So, what are the implications for next week? Don't know just yet! Monday and Tuesday's trading should reveal the short-term trend. If the bounce was primarily induced by short-covering, this does not represent quality buying, and since there was no follow through on Friday and the advance/decline ratio was very negative all day long, it could mean that another short-term top is in place and we are ready for another two-week decline into early July. Why then? Because there is at least one, and maybe two cycles that should bottom at that time, and it comes right after the next Fed meeting which could bring more disappointment. There is also an unfilled point and figure count which could still bring a slightly lower low. Do you remember the top distribution area which I pointed out on an hourly SPX chart a month ago? It consisted of two distinct phases. Let's look at the chart again with our focus on the phase II projection.
Phase one gave us a Point & Figure count to 1253, but a confirming count said 1243. The SPX ended up reversing at 1245.34. Close enough!
Phase II has a count down to 1192/1200. So far, we've gone to 1220 which was a maximum Fibonacci short term phase count, so perhaps we are done and won't be lucky enough to come as close as we did with the first phase.
Looking at the weekly chart, you can see why this is a good area for a bounce. There is support coming from a bottom channel line and the momentum oscillator is deeply oversold. But this does not mean we must go up right away. We could still have a test of the lows.
The 20-week cycle has been a little bit of a source of confusion (for me, anyway). I found it odd that it should not give the market better support after having ostensibly bottomed along with the 6-week cycle on 5/24, and that new lows should be made so soon afterwards -- although the pattern makes perfect sense from an Elliot point of view. I now think that the current weakness may be caused by the 9-month cycle. I have remarked before that this cycle is better defined in bear markets, and that its influence is negligible in bull markets. So, if the top has been made and the 4-year cycle is exerting greater and greater downward pressure, it makes sense for the 9-month to be more of a factor once again.
Many consider the 9-month and the 40-week cycle to be one and the same. I believe that they are two distinct cycles, but because their phases are only two weeks apart, there comes a time when they become practically indistinguishable from each other and are easily confused.
Let's assume for a moment that we have arrived at an intermediate-term low. What does the market need to do to confirm this? At a minimum, the SPX would have to overcome the 1262 level, and it would probably have to do it by next week. Then, it should follow through by breaking out of its downtrend channel. Also, as a leading indicator, the NDX would have to start leading to the upside once again. As you can see on the next chart, this is, in fact, already beginning to happen. The relative strength of the QQQQ is improving. During the rally, it came right up to its former short-term top, whereby the SPX did not. If we do have another retracement before these highs are exceeded, the SPX could make a new low while the QQQQ does not. Anyway, why speculate? We'll know soon enough.
Here is another interesting chart! Look at how the stodgy old Dow is now outpacing all the other indices. The Russell 2000, which was the strongest index along with the NYSE Composite, is now one of the weakest. But the Dow is currently up against resistance created by the top line of its down channel and overhead supply, and this may turn it back temporarily. The same is true for the NDX. Also, the lack of cohesion among the various indices could be an indication that a little more time is required to form a base.
I remember saying that, after the correction, the strongest indices could still make new highs. But the Russell 2000 and NYSE have given back so much that it now looks as if the Dow may be the only one capable of making a new high if we get a strong enough intermediate move. Anyway, we'll know better how far the rally can take us after the base has been completed and we can make some kind of valid projection.
This is where we stand! The next chapter will be written next week and it will clear up some of the current ambiguities.
After a decline of nearly 100 points which probably represents the first leg of a downtrend into October, the SPX is getting ready for a rally of intermediate proportion.
While the reversal could have come last week, it remains to be confirmed. The action of the next few days should determine if the uptrend has already started or if more basing action is required.