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 12-year and 10-year cycles are still in their up-phases, and should continue to influence the long-term trend.
SPX: Intermediate Trend - 1328 was just shy of our 1332 projection. A pull-back to the middle of October is likely, but are we quite ready for it?
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.
In the last newsletter, I suggested that the SPX could make it up to 1332 before finding a top and rolling over into the October cycle lows. This projection was based on a Point & Figure count taken across the 1225 base in July. We came close! Last Wednesday the SPX touched 1328.53. The next morning I issued the following update to my subscribers:
I want to repeat comments which I made yesterday: ...the top of the 3-week cycle should either be here or coming up. Can't last much longer! Although 1332 would have been ideal, 3 ½ points shy could be all we get...
My indicators were showing negative divergence and suggested that a short-term top was at hand, probably the beginning of the retracement into the 3-week cycle low. With the 10/20/40 week cycles due to bottom about the middle of October, this might be the beginning of a decline into that time frame.
The subsequent action on Friday began to confirm that view, although I stressed that the SPX had to trade decisively below 1313 for this scenario to take place. Friday saw 1310.94, but the close was at 1314.68. Therefore, the confirmation will have to be delayed until next week. Since the afore-mentioned 3-week cycle low is due either next Thursday or Friday the market action over the next few days will have to be watched carefully.
Why put so much importance on the 6-week cycle? Because it is and excellent gauge of market direction. It consists of 4 phases: a strong initial up-phase, a weak down-phase into a 3-week low, a weak secondary upphase, and a strong final down-phase. The degree of strength and weakness in each of these phases tells us a great deal about overall market strength and weakness concerning the intermediate term.
Let's start with a chart showing you the progression of the 6-week cycle, and then we will look at it from a larger perspective. The lows are marked with dark-blue asterisks. Note that the two previous ones spanned 30 and 22 trading days. The odds strongly favor that the current one has peaked, and that we are now pulling back into the first 3-week low which is due, ideally, at the end of next week. The first wave of selling was contained at 1313. If it stops here and the market goes sideways for the next few days, there is a good chance that we could still see 1332 in the next up-phase of the cycle. But, if another selling wave materializes, it could take the index down to about 1305 and increase the chances that 1328 was the top of this move.
This chart also shows the ascending wedge outlined by the converging blue trend lines and within it, 5 small waves labeled 1 through 5. This is the ending diagonal which was discussed in the last newsletter. At that time, we were only on wave 4. Now, the 5 waves appear to be complete and since the pattern calls for a retracement after completion, there is a good chance that this is what was started in the last couple of days. But here again, the SPX needs to move below the blue uptrend line to confirm that the top has been reached, and this is why a decisive break below 1313 is needed.
Finally, the chart enables us to compare the relative performance of the NDX to the SPX for reasons that we have discussed many times before. It is obvious that the NDX is currently moving pretty much in tandem with the SPX. If we want to be picky, we could even say that it is slightly stronger. This will have to change before we can forecast serious weakness ahead.
In the last newsletter, I wrote: Cracks are beginning to appear in the uptrend. The most visible are in the lower (A/D) oscillator which has now broken a 4-month trend line. The upper one (momentum) is getting ready to do the same, but since it is retracing from an overbought level where it remained for some time, the retracement is normal and is not an indication of imminent weakness.
In the daily SPX, I have identified the 5 waves of the ending diagonal with trend lines and numbers. You can see how the lows of the 6-week cycle were instrumental in forming waves 2 through 5. Note also that the former high was exceeded by a small margin, but it did not bring about massive short-covering! The above comment was based on signals given by the indicators below. They have both continued to worsen, especially the lower one which has definitely rolled over and has started a downtrend. This shows that the breadth of the market has been deteriorating for the past few weeks, and perhaps price is beginning to suffer the consequences. The top indicator, which reflects price momentum could be ready to follow the path of the lower one. Another reason to think that the high might have been reached.
I have projected forward the areas in which the 20/40 weeks and 6-week cycles should make their lows. You can see that this will take place in close proximity, and they should reinforce each other in creating some final, climactic market action.
But then what? After the intermediate cycles have bottomed, can the market make a new high? Could be! The short and intermediate cycles by themselves do not give us enough visibility into the future at this time, but they should give us a warning when the longer term cycles that have supported the bull market begin to turn down. Also, the fact that the structure of the various indices does not form a coherent whole could mean that we still do not yet have the makings of a major market top. When all the indices have completed longer term structural patterns, we can suspect that the 12-year and 10-year cycles have topped. In fact, both the monthly and weekly momentum indicators are beginning to show potential topping patterns, but this analysis is for another day. Our focus today is on the very short term and trying to determine if 1328 will be the high of the move which started at 1225.
It is always instructive to look at the McClellan oscillator vs. the summation index. As you can see, the oscillator is very similar to the one I show above, and the summation index is just beginning to roll over. It may not need to be in full retreat as it was at the last top to signify that a market high has been reached. Perhaps more important is what the NYSE composite (above) is doing. It has clearly lost its upside momentum and is beginning to roll over. Since this is the broadest-based index, this pattern cannot be taken lightly.
The SPX made a new bull market high last week. But it was only by a couple of points and then it immediately began to retrace. That is not a sign of strength, but perhaps more indicative of a last-gasp effort. This is supported by steadily deteriorating market breadth and, since intermediate cycle lows are due in Mid-October and the short-term structure appears to be complete, the index could be at, or within a few days and a few points of a top.