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 but their influence will be reduced in the weeks ahead as intermediate and long term cycles bear down into year-end.
SPX: Intermediate Trend - The uptrend from June '06 is coming to an end and could already have ended for some market indices. An intermediate decline is expected to begin before the end of February.
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.
What's Ahead?
Overview
Under "Projections", the last newsletter stated the following:
There are a number of potential Point & Figure projections for the rally in the SPX which started last week. The mid-course correction of the 6-week cycle formed a complex structure. A short-term base caused by the first low at 1404 was followed by subsequent testing of the low for two more days. This extended the entire base to a potential count of 1440, while the short base has a maximum count to 1433.
The SPX did, in fact, rise to 1435, had a 15-point retracement, and then rose to 1440. This completed the count generated by the entire base and was followed by a sharper reversal.
In the process, not only the SPX, but most major indices rose to new bull market highs, except for the NASDAQ. It's interesting that the NDX was, again, the forerunner of this rally by displaying strength ahead of the rest of the pack. I remarked on this bullish divergence in the last newsletter but, in the recent rally, the NDX has gone back to a condition of negative divergence. This would suggest that the present decline has not concluded, a fact which, as we will see later, is supported by the current cycle configuration.
The other index which did not make a new high was the Russell 2000. This index also has forecasting value for the rest of the market, but it does not seem to be quite as precise and sensitive as the NDX.
And, of course, GE not only failed to make a new high, but it barely moved in the rally, and immediately resumed its decline from 1/17, reaching new lows on Friday.
Let's turn to the cycles to put this market action in the proper perspective.
Cycles
In the last newsletter, the cycle summary read:
Since the bottoming of the 4-year cycle during June/July '06, the market has been in a powerful uptrend, but with the 6-week cycle 20 trading days along in its normal 26-30 day phase, a short-term top is very near. Best guesstimate: a high point could be reached by next Tuesday, followed by a decline into January 22-23. After a rally into the end of the month, the 20-week cycle should take over and cause a decline into early to mid-February. By then, the influence of the 9-month cycle should increase and extend the correction to about the end of March.
Starting with the 6-week cycle, the forecast was nearly perfect for the top and the bottom. The rally which started on the 22nd was caused by the 6-week cycle, which extended the uptrend that started on January 8th until the 1440 projection was reached. At that point, a larger cycle which is currently in its final down phase took over and started the decline which is now in progress. A minor cycle was expected to make its low on Friday/Monday and create a rally of two or three days before the larger cycle makes its low, which is expected to be in the first week of February, as projected last week.
What of the longer-term picture? The bull market is very definitely losing upside momentum and is about to enter a corrective phase of intermediate nature. I say "about to", because the larger decline is probably still two to three weeks down the road.
The cycle which is the cause of the current weakness is the 18-week cycle and it is expected to make its low towards the end of the first week in February. (I had previously referred to it incorrectly as the 20-week cycle, a separate cycle which will shortly be instrumental in bringing about the intermediate weakness.) During this process, the 1404 level may be challenged. If it is broken, it will confirm that 1440 was the intermediate high for the SPX. Then, the best that can be expected of the 18-wk low, would be a final test of the high in some form. However, if 1404 holds, it is conceivable that a new high could be attained. There is limited predictability for projecting a price level for the low of the 18-week cycle right now, but this could change with the market action of the next few days.
The degree of weakness in the coming intermediate correction should give us some clues about what to expect afterwards. The correction will be brought about by the 9-mo cycle which is expected to make its low in late March. It will be assisted by the 20-week cycle whose low is also due during the same time-frame. When these two cycles turn up again, they should create a good uptrend. But will it be good enough to make new bull market highs? The odds do favor a new high because the very long-term cycles -- 12-year and 10- year -- are still in their up-phases, and so is the 4-year cycle which bottomed in June/July of last year.
Offsetting the upward pressure will be the 80-week and 4 ½ year cycles, both of which are expected to make their lows around October 2007. Note that that this 4 ½ year cycle is distinct from the 4-year cycle. It is the half-phase of the 9-year cycle, which is itself the half-phase of the 18-year cycle which made its low in March 2003. Consequently, the 18-year cycle is adding its upward pressure to the other two longer term cycles mentioned above. No wonder we have an energizer bunny bull market.
In any case, the 80-week and 4 ½ year cycles will at some point begin to exert downward pressure as they get closer to October 2007. The question is: when, and from what price level? We should have some answers after the March lows.
Projections
Can the 1440 level be surpassed? There are current Fibonacci projections extending to 1447 and others can develop -- as well as point & figure counts -- after the correction is complete. They should be considered if the 18-wk low does not trade below 1404.
As far as the 18-wk low is concerned, I only have a potential low at 1410 at this time. But this is very preliminary and it could be altered by the action of the next few days.
It is also far too early to predict the extent of the decline into late March. Perhaps by the publication of the next newsletter we'll have some clues.
Breadth
Nothing has changed about the intermediate breadth picture. The Summation indexes for the NYSE and for the NASDAQ are both in a downtrend. This usually precedes a correction in the stock market. They have slowed down slightly in the past few days, but show no sign of reversing. This matches the current cycle configuration.
The new highs have slowly retreated from their earlier strength, but the new lows have not expanded. No sell signal has been given yet.
Structure:
Nothing decisive there either. The current pattern may be a corrective wave in an ending diagonal prior to the final wave up. The next few days will decide.
Summary
The intermediate cycle pattern suggests that we are preparing for a correction which will last into the end of March.
The short term pattern calls for the decline which started at 1440 to continue into the first week in February. This will be followed by a final rally which will either mark the final high, or be a test of the high.
If this information is of value to you, you should consider our trial subscription offer (above). 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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