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, but a substantial correction of the bull market which started in October 2002 is probably very near, or may even have already started.
SPX: Intermediate Trend - The market is at an important level of resistance which could mark the top of the uptrend which began in July.
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.
Let's begin with a review of some comments and predictions that were made in the last newsletter and which still apply today. This is done to provide a better perspective of what may lie ahead.
- We are looking for evidence of the Decennial pattern which has consistently forecasted a major top in this time frame.
- The recent market action is probably the blow-off stage of the bull-market that started in 2002.
- The SPX has reached a level of significant resistance which can stop the advance: the junction of the upper lines of two major Andrews pitchforks.
- By all measurements, the market is highly overbought.
- The leading indices such as the BKX, NDX, RUT and XBD have been lagging the SPX by a substantial margin and GE, another excellent predictor of the market's future trend, has joined them.
- There were projections which focused on the SPX 1368-1393.
- And I concluded the analysis with this statement: Since these projection levels coincide with the intersection of the two pitchfork channels shown on the above chart, I believe that a top will be formed in this general area.
So far, so good! The SPX and other indices have obliged with the second largest -- but still minor -- correction since the July low, and this has created a sell signal in the daily indicators. Now what? Yes, we are at an important juncture and we may have begun the process of reversing not only the July rally but, most probably, the entire bull market run since 2002. The challenge will be to determine the shape of this reversal. Have we seen the high of the move? Or is there one more high in store before the beginning of a significant decline? With the understanding that the elections results may have some impact, let's see what we can glean from the charts.
First, let's look at the updated weekly chart of the SPX on which the two pitchfork channels have been drawn. I think that it is already clear that the formidable resistance provided by the intersection of the two upper channel lines is not going to be easily penetrated. But it does not mean that the SPX will give up trying after the first attempt. If you look at the oscillators at the bottom of the chart, neither one shows signs of negative divergence. They don't have to, of course, but the majority of the time they either show divergence or some sign of deceleration at an important top. There is no indication of either one yet. From this alone we should conclude that the high may not have been reached and a test will be forthcoming before a reversal of the trend takes place.
Market trends have the habit of moving in well-defined channels which clearly mark their boundaries. The next chart (hourly SPX) will show that multiple channels were created in this uptrend, the shorter ones rising at a steeper and steeper angle. I have not shown the origin of these channels because it would have condensed the chart too much for me to point out clearly some of its features. Also, take note that there is one more channel not shown here which is even broader and which will be illustrated at some future time.
The shortest and steepest channel is marked in dashed lines. Notice how it stopped every rally. The upper red circle shows how the SPX came down to its lower channel line and bounced off before breaking out of it. Prices have now reached the lower trend line of the next broader channel defined by the solid black lines (lower red circle).
What I am trying to point out here is that this is the manner in which trend reversals take place. For a confirmed sell, all the channels must be penetrated to the downside. This process has only just begun, and there should be rallies before it is complete. The next channel is the blue one, and it is the most important of those shown here. The lower trend line is currently just above 1350. But before reaching it, the decline would have to continue beyond important support at or near 1360. This is a very strong Fibonacci level which had been in place for many months, pulling prices upward until it was finally reached. The fact that it was briefly surpassed by some 30 points is irrelevant to the larger picture. Look how quickly prices have already retraced close to that level. It would be a good area in which the SPX could re-group and mount another rally to test the highs.
A breach of this level would probably result in a pull-back to the former 1326 top.
Now that we have pointed out why we don't yet have confirmation of a final market top, let's turn our attention to the current short-term correction to see if it is nearing completion. For this purpose we'll look at another chart of the hourly SPX, and one of the NDX.
The same channels drawn on the previous chart are drawn on this one. The sell signal given by the A/D above was quickly followed by the breaking of a short-term uptrend line. The decline has continued to its present level where good support exists and short-term projections have been met. Time-wise, this is also the general area of the 6-week cycle half-span. Two attempts at rallying have failed. But the last one brought only a minor extension of the decline and on Friday, positive divergence was apparent in the A/D. It is also showing up on the momentum indicators underneath the NDX price chart. This would suggest that the pull-back may be coming to an end, but for a resumption of the uptrend to be confirmed, the previous top (marked by the purple line) will have to be overcome and supported by a strong showing in the A/D and the momentum indicators.
If we do get an extension of the intermediate uptrend, how far can it go? The next zone of projections ranges from 1398 to 1404. If reached, this would put the SPX once again right up against the long term forks' resistance.
On the NDX chart, prices have only formed one channel and when it is decisively penetrated to the downside and confirmed by other indicators, it will signal that this index has made an important reversal. On Friday the NDX rebounded from the bottom trend line of that channel, a level which corresponded with previous support (red line).
In the last newsletter I mentioned that the sentiment indicators were not yet at levels which are associated with major tops. They still are not and this would be another reason to expect a little more to this uptrend. Nevertheless, since these are secondary indicators, I would prefer to place more emphasis on the technical aspect of the market. For instance, although the A/D has shown some weakness lately, the NYSE summation index has yet to exhibit major divergence to price.
In the past two weeks, the stock market suffered a minor set-back. While this could turn out to be the largest correction of the near vertical ascent since July, it is too early to call for a major top and there is a possibility that the October 26 high will be challenged in the coming days. A failure to surpass that high -- or to do so by only a small margin -- would be an indication that we may have reached the end of the 2002 bull market.