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
As I mentioned in Friday's updates, the market is now in a period of high risk for the bulls. The top of the advance which started 1220/25 is coming to an end. It will also probably be the end of the bull market which started in 2002 as well. The top could come as early as next week and be about 20/25 points away. Our task will be to fine-tune our analysis to get as close to the final tick as possible. How will we do that? By analytic logic!
First of all, there are 2 main possibilities here:
- The SPX topped at 1389 and we are currently testing the highs before starting down in earnest.
- The SPX is going to make a new high before an important reversal. (preferred)
So far, there is no clear indication that we have topped, and there are indications that we should be moving higher. Structurally, there are at least 2 possibilities about how to accomplish this: The first is that on Friday we already started the final (or near final) move up. This will be evident on Monday morning because if we have, the market should start up strong out of the gate. The other requires additional corrective action before the final up move, and if this is what the market chooses to do, it should also be evident on Monday. In either case, the SPX target for an eventual top should be 1400/1405.
The target is based on Fibonacci price and time ratios going back to the 2002 lows, and confirmed by some shorter-term targets. Do we have to go there for certain? Of course not! But until the market tells us differently, this is still the best option.
Let's look at a couple of charts: First the hourly SPX. Notice the two channels on that chart. The green one is drawn based on the current up trend line and its parallel. The brown one is the wider channel which I mentioned in the last newsletter. Look how the green uptrend line intersects with the mid channel line of the brown one. This is precisely where the SPX found its support as it met its 1361 projection. The first confirmed sell signal will come when we break the green uptrend line. The market would then be expected to find temporary support on the lower brown channel line, or just below it.
The chart also denotes my tracking of the 6-week cycle. I have done away with attempting to define the mid-point correction because it is too erratic. Under the influence of the strong uptrend from 1225, the last 6-week cycle low was ill-defined and difficult to pin-point. I have marked two possibilities (asterisks with question marks). Determining where the past cycle bottomed is helpful in order to define the low of the current cycle. I have suspected that the 1361 low was caused by the current 6-week cycle and by making the adjustment to the second asterisks for the last low, I come up with three equal time spans (purple lines) which pretty much confirms 1361 as the bottom of the current cycle. I will hold this assumption until it is proven or disproved by the next cycle low.
Why is this important? Because, if we have just made a 6-week cycle low, its up-phase gives the market time to rise to a new high over the next week to ten days and, consequently, added credibility to the probability of a new high.
Finally, look at my momentum indicator at the bottom of the chart. Note that it just barely reached an oversold condition. I do not think that it is yet ready to support another up-move without further consolidation, and this is why I opt for the second scenario.
The next chart will be of interest to those who trade the NDX. This is a chart of the trust, which is identical to the NDX, and it sends the same message. It is obvious that this index is stretched as far as it can go, having reached two very important Fibonacci targets. Considering the market position and the fact that an important top is expected, it would seem logical that the line of least resistance is now downward.
One more chart to make clear why I think that the current pull-back requires a little more consolidation before moving up to its final destination. I have chosen to illustrate this on the NDX where it is much more obvious.
On the right, the hourly NDX and on the left the NQ A/D. Look first at the momentum indicators under the index price. Do they look to be in a position to give a buy signal? Not to me.
Next, look at the A/D chart on the left. A buy signal normally consists of the A/D rising well above 1000+, and it happens on the first day of the break-out. This did not happen on Friday. The closing A/D was less than 700.
Conclusion: more time is required for the indicators to get in a buy position.
- The SPX could have made its high at 1389, but this is not likely
- Targets to the 1400/05 level suggest that the SPX has not yet reached a top.
- The current short-term correction probably has a little more to go before the final run-up.
- Fibonacci ratios suggest that the NDX should make a long-term double-top when the market makes its final high.
- All of the above are only probabilities, and these will be closely followed with daily updates.