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
Why an Interim Report?: I have been publishing this newsletter since May 2004, mostly every other week. However, with the bull market showing definite signs of needing a rest, I feel that a weekly update is appropriate until a top has been confirmed. We may not have to wait very long for this. This past Friday, an intra-day update to my subscribers stated the following:
Reaching the 1403/4 target on light A/D negativity was a recipe for a rally. But the rally was on puny A/D also! So now what? We may be at a decision point right now, or will have to wait for the Fed. There is an outside chance that the 6-week cycle may have bottomed this morning, but it would be both shallow and short and therefore not convincing. Can't be discounted, though. Whether it has or not, we are entering the final phase of the uptrend. The question will be whether we end it sooner, or later, i.e. before or after Xmas. The most tricky would be to do so before. This would deceive the most people since a Xmas rally is expected. If the market goes to sleep here until Tuesday, we won't know for a while.
In this issue:
- The influence of short-term and intermediate term cycles.
- Negative divergence in the NDX
- Analyzing the end structure
- Projections for the final high
Why is a top close at hand?: The heading above mentions that my analysis is multi-dimensional, including cycles, structure, and price projection. Because the nature of the stock market is fractal -- i.e. smaller trends make up longer trends -- it is important to have a system of analysis which is adaptable to all trends so that one can identify when the final short-term move of an extended trend comes to an end.
The rally which started in June/July 2006 could be the last intermediate-term segment of the bull market which began in October 2002 (I say "could be" because it may be part of a long-term topping process which is only beginning and which may continue for several more months), and the shortterm trend which began at 1378 on the SPX is, itself, likely the last stage of that rally. This means that when it comes to an end, it will be followed by a market reversal which should be, at a minimum, of an intermediate nature. The move from 1378 is about two thirds complete and we may already have started the final third. Let's illustrate this with hourly charts of the SPX.
First, a longer term chart that shows the complete move from the June/July lows. Note that prices have observed a well-defined channel and that they are still trading in the upper part of that channel. This is a sign of strength, but it is ebbing! In the weeks prior to November 3rd, the index forged ahead with only minor corrections. Now, that process is becoming more labored. The last two corrections were caused by the 6-week and the 10-week cycles. They both ended on the median line of the channel and they were followed by short-term uptrends. Now the 6-week cycle is once again ready to make its low and ideally this should come next week. Will it once again bring the index back down to the median line before turning up? It may, but whether or not it does is not as important as what happens after the low. If it fails to produce another strong short-term rally, it will signal that it is ready to move into the lower half of the channel, and perhaps out of it as well.
Now let's compare the above chart with an hourly chart of the NDX. It's obvious that the distribution process is more advanced in this index, and I contend that this is the first real sign that a top is at hand. In fact, the NDX appears to be ending its uptrend very much in the same way -- but on a smaller scale -- as the one which ended in January of this year; there was a climactic move followed by a period of distribution. So far, this is what the chart is showing. While the SPX is still trying to make new highs, the NDX is already trading in the lower section of its up channel, and it appears ready to break below it.
Now, we'll go back to the SPX and take a closer view of what's going on technically, concerning ourselves primarily with what has taken place since the 10-week cycle made its low.
Here again, we have a well-formed short-term up-channel. On Friday, the index moved into the lower portion of its channel, found support on the lower trend line, and encountered the conditions described in the "update", above. This created a bounce which had little follow through, raising the question as to whether the "final third" of the advance has already started, or if more correction will be required first.
The answer lies with the 6-week cycle. Has it already made its low, or is it still ahead of us? Only the market action in the next few days can answer this question. There is an outside chance that it has, but the odds are in favor of some additional correction into next week. With the Fed meeting to consider short-term interest rates on Tuesday, it is possible that we won't know the answer until after the decision has been made.
However, we can discuss logically what should happen after the cycle low is in place. Structurally, there are already two well-defined up waves to the uptrend which started at 1378. When wave 4 is complete, wave 5 will start, and when IT is complete, it will put an end to the entire move from 1378, which should bring about a decent short-term reversal. Now, if wave 4 was caused by the bottoming of the 6-week cycle, and its initial up-phase causes wave 5, does this mean that the next 6-week cycle will make an early top? This would be bearish indeed, and it is what we must determine in the next few weeks.
Besides the negative divergence which is beginning to show itself in the NDX and which always seems to be a precursor to a top in the SPX, we also have to recognize that the 10-week cycle low is the half-way mark of the more important 20-week cycle. Therefore, we can assume that, being past its peak, the 20-week is going to start exerting more and more down pressure. This is why a failure in the 6-week cycle would indicate that an intermediate top is in place and a reversal has started.
Another -- and even more important -- cycle is coming into play: the 9-mo cycle! Its last low was in June, and it was partially responsible for the strong uptrend that developed from that time period. Since it has a normal span of 37/38 weeks, this places its next low in mid February. And since the 20-week cycle is expected to make its low in early February, the combined declining phases of these two cycles should provide the first intermediate-term decline in quite a while.
How much of a decline, and what is likely to happen after that, will be discussed after we have a confirmed top.
Projections for the final high: Only approximations coming from Fibonacci ratios -- some extending back to the 2002 bottom -- can be made at this time. After the 4th wave is deemed to be complete will we be able to verify these estimates with shorter term Fibonacci targets and a Point & Figure count.
Current longer term projections range from 1426 to 1433 for the SPX. But it is possible to estimate at least one shorter term projection, and it ranges from 1424 to 1432, consistent with the longer term counts. So it appears that as the pattern moves toward completion, only refinements will be needed to determine the exact reversal point.
If this information is of value to you, you should consider our trial subscription offer below. Daily updates consist of a Morning Comment, Closing Comment (which occasionally includes an updated hourly chart of the SPX to illustrate the analysis), and at least one or more updates during the trading session whenever it is warranted by market action. These updates discuss phase completions, give projections, potential reversal points, and whatever else may be pertinent to the short-term trend.
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