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 - We may soon know whether or not the top of the 4-year cycle bull market has been made.
SPX: Intermediate Trend - The intermediate trend may have begun a sideways pattern with a slight upward bias which could last for several weeks or even months.
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.
The past two weeks saw most indices extending their gains from the 7/18 low and making what may only be a temporary top on their way to challenge the May 8 high. By the end of last week, the SPX had pulled back to an important short-term support level. If it holds, then the rally which started at 1225 will extend its upward course and could shortly challenge the 1326 high. Let's look at some charts to illustrate the above statements.
First, the weekly SPX chart for a long-term view. There is not a great deal to say about this chart because little has changed in the past 9 weeks. After dropping from the top half of its long-term (Andrews pitchfork) channel to the bottom half where it found support, prices are now fluctuating in a fairly narrow range -- by long-term standards, and frustrating both bearish and bullish investors. Two weeks ago, the red center line demonstrated its value as a resistance line when it stopped the second attempt from the lower channel (blue) line to make it back to the top of the channel. If the SPX can consolidate in this area and has another go at the red line, it might be successful at penetrating it next time.
The daily SPX chart gives us more to analyze. Let's start with the price chart itself. Same observation here: the index found resistance where it should have in the zone demarcated by the dashed line and the red line. This coincided with an overbought MSO (modified stochastic oscillator) momentum indicator, and some divergence occurring on the lower, A/D oscillator.
I am fond of finding parallel lines -- channel lines -- which offer support and resistance. You can see that the parallel (solid black) lines which have been drawn on the chart have served as support as well as resistance. Now the SPX has come to an important juncture because after it was stopped from going higher, not only by the longer term mid-channel resistance line, the resistance created by a former high (horizontal red dashed line), and by the last parallel line drawn from the 1226 top, it has dropped back to good support.
The index is at what should be a very strong short-term support level. Not only is it resting on the top of the second parallel line from the right, but also on good support offered by previous short-term highs (horizontal red lines). It now has a choice: It can either break below that support and continue once again down to the bottom of the channel, or it can resume its uptrend, break through the overhead resistance, and challenge the former high of 1326 which was made on 5/8. The coming week should decide. Note that if it chooses to go up from here, there are no more black resistance lines to suppress it after it has crossed the last one! This could bring about a fair amount of buying and create a sharp uptrend.
The indicators are still in a downtrend, confirming the pull-back from 1292.92, but they also remain above their longer term (green) uptrend line. Their position suggests that decision time may still be a few days away. Here is the chart:
The analysis would not be complete without taking a look at an hourly chart of the SPX. Every important move begins with a single up-tick or down-tick and, by looking at intra-day charts, we can see patterns developing that cannot be observed on daily and weekly charts.
On the price chart, you can see where there was a mini-climactic short-term move to 1292.92 before the shortterm pull-back started. This was an important level, because my Point & Figure chart had given me several counts which clustered between 1292 and 1296, and some exactly at 1293. This indicated that at least a shortterm top should take place at that level, and indeed it has. That level also marked the top of a resistance line which connected several tops on the way up.
We can now see that the uptrend channel which is drawn with parallels to the top line has been penetrated to the downside, but only slightly because the SPX found support almost immediately below it for reasons that were discussed in the daily chart analysis. We can also see that the mid-range (red) trend line served as resistance when prices tried to get back into an uptrend, and before they broke below the lower channel line.
Now, if we shift our attention to the corrective pattern since the 8/3 top, we can see that, here also, the parallel lines serve to identify support and resistance points, just as they did on the daily chart. Based on this analysis alone, it appears that there is a little more work to be done before prices get back into an uptrend -- if this is what they intend to do. The last resistance line currently lies at approximately 1275, and if there is a little rally on Monday as a result of the probable end to the hostilities in Lebanon, this would be a good place for that rally to stop, especially since it corresponds to the resistance offered by the former top (horizontal red dashed lines). That top met with resistance at the (red) extension of the former lower channel (green) line.
The price indicator (MSO) also does not look quite ready to signal the beginning of a new uptrend. It has been oversold and basing for 3 days, and on Friday it started to move back up, but that was from a level which did not show positive divergence.
If we now turn to the hourly A/D chart on the left, the first thing we notice is that the green uptrend line which connects the lows was only decisively penetrated on this past Friday! I place a great deal of emphasis on this, because I consider this to be an indication of underlying strength in the SPX. And now, the A/D line may already be trying to establish another uptrend, but this is much too premature to state with certainty.
Just like the price indicators, the A/D indicators are also suggesting that a little more work will be needed before we can determine that the corrective action has ended. Let's look at the charts:
Now that we have thoroughly analyzed the action of the SPX, let's see where things stand when compared to the NDX. The long-term pattern tells us that not much has changed, and that the NDX continues to remain much weaker than its fellow index. But there might be a subtle change taking place on the shorter term. Temporarily at least, the extreme weakness which has characterized the action of the NDX over the past few weeks may have shifted to a holding action whereby this index looks as if it is getting back in step with the SPX. There is a good reason for that. The Point and Figure count of the NDX -- actually of the QQQQ -- indicated that a temporary downside target had been reached at 36 (although 35 may also be a possibility).
Parallel lines drawn on the NDX indicate that the index is challenging its last and most important downtrend line, and if it should close above it, it could have a good rally. Since it is inconceivable that this index would do this independently from all others, and since this "break-out" appears to be imminent, it adds to the view that a significant short-term uptrend may be right around the corner. Something to watch for!
An overall look at the relative performance of the various indices should give us a good feel for the general state of the market. Take a good unbiased look and leave your prejudices aside. What do you see?
An interesting chart is that of the DJ Transports. Note how the price broke down many days ahead of the announcement that a terrorist plot to blow up airliners was foiled. Was that subconscious pre-cognition, or did someone know something a month ago?
Cycles: The 4-year cycle cycle is still out to lunch, and the 10-week and 6-week cycle lows continue to elude me. Are they the cause of this correction?
The SPX is at a decisive juncture from which it can either extend its rally to challenge its May high of 1326, or break down and perhaps penetrate the bottom of its long-term channel. We should not have long to find out which it will be.