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, but it remains to be confirmed.
SPX: Intermediate Trend - A secondary reaction started from the 1220 level and is still in effect.
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.
After two weeks of range-bound trading, the SPX broke out to the upside. The trigger was last Thursday's Fed announcement which was construed as dovish, and which brought about buying that was enhanced by end-of -quarter window dressing. The move was very similar to the one which took place from the 1220 level on 6/14 both in scope and in nature, in the sense that special circumstances led to a quick, massive short-covering rally instead of a gradually developing uptrend.
Just prior to the Fed's pronouncement, the SPX was at a decision point. Some lower potential projections still existed, and the position of some cycles were still ambiguous. It appears that all this has been cleared up. Or has it? Is this another "sucker's rally" which is going to go nowhere, or the beginning of something worthwhile?
Let's begin our analysis with the longer-term picture, which is always where one should start. The following is a weekly chart of the SPX showing what I call the second phase of the 2002 bull market. I have drawn the upward long-term channel using Andrews pitchfork. You can see that after nearing the top of the channel and spending a considerable amount of time in the upper half of the channel, prices finally plunged to the lower trend line where they found support. That level was a decision point because either prices would rebound or they would keep on going. An initial rebound was expected and it took place at 1220. What came next was undetermined until last week's move to a higher level. But is this still part of the rebound, or is it the beginning of a re-test of the highs? There are no easy answers until the market gives us more clues, but we can at least look at the weight of technical evidence concerning where we are and examine some of the positives and negatives. First I will list them, and then discuss them.
- With the bounce off the lower channel line, the long-term uptrend remains intact.
- By moving out of its short-term consolidation range, prices have signaled that they are back into a short-term, and perhaps intermediate-term uptrend as well.
- The short-term advance-decline has become positive and is supporting the short-term uptrend.
- The new highs-new lows index has also turned positive.
- During its 2-week trading range, prices formed a point and figure base which has the potential of taking the SPX back up to 1323, and perhaps even higher.
- And last -- but not least -- the 12-year and the 10-year cycles are still in an uptrend.
Note that I am not including sentiment indicators in the positives because they have been unreliable and misleading lately.
- The biggest negative against an uptrend is that the declining 4-year cycle should make any sustained advance difficult.
- Looking at the weekly chart, there is strong resistance at the mid-channel point which is represented by the red line. This resistance is enhanced by a very important former short-term top at about 1290. This could be the make or break level for this advance.
- Before we get to that level, the SPX should find resistance at the top of a shorter-term channel that is illustrated on the hourly chart of the SPX which appears next.
- The current pattern from the lows looks to be corrective and not impulsive.
- And, last -- but not least -- the NDX continues to lag the SPX. This has never been a bullish sign for the intermediate term.
A non-technical negative is the fact that crude oil prices have not only remained very firm, but appear to be making a re-accumulation pattern which looks very bullish.
A chart of the hourly SPX will help us analyze the short term in connection with some of the points made above.
Short and intermediate term cycles have been a little confusing of late. The 20-week cycle was seen by most analysts as having made its low where I have placed it on the weekly chart above. Some thought that it bottomed later, and others are still looking for it to make its low in July. Obviously, it was overridden by a larger cycle which I believe to have been the 9-month cycle and which everyone -- including me -- seemed to have forgotten about.
Now, the 6-week cycle is being troublesome! This is what I wrote to my subscribers in my closing comment on Friday:
I don't want to get too rigid about cycles, but the 6-week cycle is one of the most regular cycles. It normally has a span of a minimum of 26 trading days and has, at least once in the past four years gone 35 days, but normally makes its low around 28-29 days. If this cycle bottomed this week and caused the rally, it was only 24 days in length. This would be a new historical precedent, at least for the past 4 years. Anything is possible, and it could be that the cycle low was forced by special circumstances. It could also mean that the end-of-quarter window dressing plus short-covering, along with the Fed announcement caused a rally which will be followed by the normal bottoming process of the 6-week cycle. We'll see!
So, we'll see! There are times when things get muddled, no matter what methodology one is using, and the only remedy for that is to wait for the market to clarify itself.
The current rally will soon encounter resistance at the top of a short-term channel, at about the same time that it reaches a short-term point and figure projection and enters a short-term Fibonacci target zone. Note also that the hourly momentum indicator is overbought. These conditions should bring about a correction, and the manner in which it develops will tell us more about the status of the move which started at 1220. It will also give us a clue about the nature of the corrective wave that is forming, when it should complete, and what to expect afterwards.
Point and figure congestion patterns at a top or a base are valuable in determining the extent of the move that lies ahead but, as we just witnessed, projections from those levels can be somewhat altered by other technical factors. In this case, the bottom trend line of the up-channel stopped the previous decline from reaching its full projected deployment. Now, the recently formed base carries a potential bullish count to 1323. This cannot be ignored and it is possible that, by hook or crook, the target will be filled, -- unless it is invalidated by subsequent market action. This may be achieved quickly or it could be a long, drawn-out process, but our first real clue should come when we see how much of a decline is generated by the anticipated reversal. An obvious "must" for the uptrend to achieve its full base count potential, is for the SPX to move beyond 1290. As stated earlier, this could be the make or break level for this uptrend.
An important area of the market to watch is the breadth. As you can see next, the McClellan summation index is very oversold and this is an area from which rebounds tend to occur. But oversold does not tell you how far the rally should go. Indicator patterns can vary substantially from bull to bear markets, and it would be unwise to determine that a substantial rally is about to unfold just because this indicator is at a level from which significant uptrends have started in the past, e.g. the April and October 2005 lows. The viability of any rally should not be determined by one indicator alone. What we can say, however, is that for the current uptrend to continue, it will have to be supported by positive breadth. If this falters, the end of the trend will come quickly.
In order to simplify the analysis, we can state that the trend will remain up until the SPX breaks out of its longterm uptrend channel. If prices cannot move out of the lower half of the channel within a few weeks it is very likely that the trend will reverse, the trend line will be breached, new lows will be made, the 4-year cycle top will be confirmed, and we'll be on our way to another 4-year low in October/November. On the other hand, if the upper half of the channel can be reached, then there is a very good chance that the SPX can, at least, make a double-top.
Finally, I want to show you an updated weekly chart comparing the SPX to the NDX. The divergences at the top are clearly predictive of a reversal when the NDX under-performs the SPX. Look at the top of the dashed red lines on both indices. Since the last topping pattern, the underperformance of the NDX has continued. It has broken out of its uptrend channel and is currently challenging a level from which, correspondingly, the SPX is still far above. But the fate of the uptrend may rest on whether or not the NDX can hold this support level, or for how long. It is something that will bear watching.
The SPX has found support at the bottom of its longer term uptrend channel, from which it has rallied. If it fails to move back into the upper half of this channel fairly quickly, it will become vulnerable to another downward reversal which should take it below the channel line and confirm that the 4-year cycle top has been made.