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 consolidation 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.
The last two weeks saw most major market indices rise to new bull market highs, with the exception of the Nasdaq. The move appeared to be a culmination of the uptrend which started on January 29th. The rally stalled near the beginning of the past week, and by the end of the week it reversed course. Friday saw a sharp decline somewhat similar to the one which occurred on January 29th. However, it was not quite as intense either in price or in breadth.
This decline may continue into the early part of next week. At the very least, it should move sideways for a couple of days before the next rally begins. In the recent past, most declines have been brief corrections within the uptrend which started in July 2006 and they have been followed by a rally to new highs. At some point, this pattern will come to an end and, based on the current configuration of cycles, the next two weeks will be a good time frame to look for the final intermediate-term high -- that is, if we have not already witnessed it at SPX 1452. We will have to watch closely to see if anything is "different" this time. Perhaps the difference will not be so much in the nature of the decline itself, but in the behavior of the subsequent rally.
NDX and GE vs. SPX: Both GE and the NDX are considered to be leading indicators for the rest of the stock market. Therefore, their present behavior should arouse some concern about the viability of the intermediate trend. There is a striking similarity between their price behavior in late 2005 and late 2006.
Both years, GE made a climactic top in December which was followed by a decline into February. The NDX made its climactic high in January of 2006, then traded sideways for a few weeks before eventually going into a steep decline. This year, the index appears to be plotting a similar course.
In 2006 the SPX diverged by continuing to move higher until May, when it found an intermediate top which was followed by a significant decline. This year is starting the same way as last, but because of different cyclical patterns, we cannot expect an exact replication of last year, only a similarity.
The weakness which took place on Friday is caused by the bottoming action of the 5-week cycle. Adding to this weakness is the mid-phase correction of the 6-week cycle. As stated above, it is likely that the SPX will not be able to get back into an uptrend until the middle of next week.
So far, there is nothing unusual about this correction. The last time that this cycle corrected it had an equally sudden and sharp decline of 20 points which lasted only a day. This time, the decline could be a little longer and a little deeper, but not significantly so. The main question is: What happens afterwards? For certain there will be some type of rally, but it should be limited to about two weeks. With every passing day, the 20- week cycle will be bearing down more and more as it approaches its estimated low point scheduled for the 3rd week in March. Since the SPX reached its high point in the last week of its nominal phase, the 5-week cycle has exhibited strong right translation, which means that the long term cycles are still pushing up. So we could see a new bull market high materializing over the next two weeks. Even if does not, it's almost a cinch that the rally will cause a test of the recent highs.
Part of the difficulty with cycle analysis is that the amplitude of cycles can be influenced by non-cyclical factors. Consequently, it is not possible to predict ahead of time how much weakness the 20-week cycle will bring as it makes its low. Nor how much restriction it will impose on the next 5-week uptrend.
Another difficulty is that not all analysts agree on the phasing of a specific cycle. The 9-month cycle is a good example. I know of at least 2 interpretations for the 9/18 month rhythm and they both appear valid, creating a low point about every 38 weeks. I have chosen one which appears to be consistently well-defined and I place its next low toward the 3rd week in April. This means that even after the 20-week cycle makes its low, the market will run into the downward pressure of the 9-mo cycle.
All we can say for the time being is that some sort of an intermediate top is in the process of forming. What we do not yet know is how much weakness it will bring about. This will be dependent on the amount of distribution which is created and which will be reflected in the Point & Figure chart.
When the SPX reached 1434 on Friday it started to rally. This is because there was a projection to that level which was derived from the Point & Figure pattern that was created at the top. However, there is no guarantee that this will be the low of the correction. Since the short-term cycle still has, ideally, another 2-3 day to run, one of two things can happen. The market will either move sideways for that period of time, or it will move lower. If it does the latter, there is another (but less-well defined) projection to 1427. If the decline stops at the higher target, the SPX will have a much better chance of making a new high. In any case, the extent of the next rally will be determined by the degree of accumulation which takes place at the end of the pull-back.
I know of no reliable longer term projection that can be made at this time for the end of the bull market. However if, as the 20wk and 9-mo cycles make their lows, they create a level of re-accumulation which is followed by a resumption of the uptrend, we should be able to take a count across the consolidation pattern and arrive at a fairly accurate target.
From early December to early January, the advance/decline ratio showed some moderate weakness that was followed by a resurgence of strength into last week and which was reflected in the McClellan oscillator. Since prices tend to make their final highs with clear negative divergence showing in this indicator, and since none is apparent at this time, it is reasonable to expect that last week's high will be exceeded in the next rally.
The structural pattern is still ambiguous enough that one cannot state conclusively that an important high has been made.
The intermediate cycle pattern suggests that we are preparing for a correction which will last at least into the end of March, and perhaps continue into the end of April.
The short-term trend came to and end on Friday, as the 5-week cycle turned down. A low could also have been made on the same day, but it is possible that the decline will continue into mid-week.
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