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 intermediate-term correction which had been forecast to begin by the end of February is now in full swing, but it may not be as vicious as it first appeared. Read on!
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.
Overview
What a difference two weeks makes! The market has just experienced its largest decline since May of last year. But it was not without warning, and I did my share of it. In the last newsletter I wrote:
SPX: Intermediate Trend - A pattern of deceleration is beginning to show in several indices. An intermediate consolidation is expected to begin by the end of February or early March.
And again: ......This is particularly noticeable in the NDX and the OEX. It could be interpreted as a warning that the market is getting tired and in need of a rest, if not of an outright reversal of the trend. ...... as we will see later, this behavior is perfectly consistent with the cyclical pattern which lies ahead.
The correction gave no quarter and all indices were treated equally. But if you look closely, the NASDAQ fared a little better than the rest. That, and the fact that just before the decline the Dow Jones Transportation average joined the Industrials in making a new high, has some interesting implications for what lies before us.
What's Ahead?
Cycles
Some will give credit for the market correction to Martin Armstrong's 8.6 year business cycle. It is true that according to his calculations, February 24th (or 27th?) was the date which marked the top of the current cycle. Credit is certainly due but, as I pointed out earlier, it was not the only warning. For several weeks now, I have been discussing the cyclical pattern that called for a correction in this time frame. Quoting again from the last newsletter:
In my last Week-end report, I mapped out the cycles which should have an influence on the trend between now and next Fall. I suggested that a nesting of short term cycles due to occur at the end of the month would create a short-term decline. This decline started when the SPX backed off after reaching 1461.57, a target that I had repeatedly mentioned as an important level, and it is expected to continue for a few more days. (errr...... make that a few more weeks!)
Besides the nesting of short-term cycles which occurred in the last two weeks, two intermediate cycles followed right on their heels: The 20-week cycle, which is due to make its low about 3/19, and the 9-mo cycle which should bottom about a month later.
The bottoming of the short-term cycles (4.5-wk and 6-wk) has created a three to four-day rally (anticipated and forecast in the daily updates to subscribers). Now it is time for the 20-week to take over once again for the next several days and to either re-test the recent lows, or to go slightly lower. Then, a better rally! But will it be the end of the correction and the resumption of the long-term trend? Not sure, but probably not right away. What I call my "unconventional" 9-mo cycle is due to make its low in mid-April. It is never easy to forecast how much weakness this cycle will bring into its low point. The similarity of the current decline to that of May 2006 could be exact, right to its last tick! June 2006 saw the bottoming of a 20-week cycle, and the retracement into July was caused by the same 9-mo cycle which is now due to bottom in mid-April. If the June-July lows were caused ONLY by these two cycles, then we may get an exact replay of the 2006 pattern. But do not expect it to continue to unfold as it did then with a major uptrend to follow. Yes, there will be an opportunity for the SPX and other indices to rise to new highs when the current correction ends. However, the uptrend should be restrained by another nest of more important cycles due to make their lows in the early Fall.
The only conclusion that we can draw about the current correction is that it is of intermediate nature. So far, there is nothing in the market action to suggest that a major top has been made.
Projections
The first count did take the SPX to 1440 before a reversal occurred. The next, which was later reinforced by a reaccumulation level with a target of 1461 was reached this past Thursday. (2/25 Newsletter)
In the last newsletter, I explained how cycles are not only helpful in determining market timing ranging from very short to very long, but how they tend to form patterns which carry predictable price projections. The above quote, taken from the last writing, stated that 1461 was an important level which could turn out to be the high of the move. Projections are made with the help of Point & Figure analysis and Fibonacci ratios. What do they say about the current correction?
Like all aspects of technical analysis, arriving at the correct projection is an art, not a science. There are always several "valid" projections. The market determines which is the most valid. The analyst must be aware of the various possibilities ahead of time, and take into consideration other factors which will pin-point the precise high or low of a move. As an example, there were two Fibonacci target zones which could be established as reversal points for the current decline in the SPX: The first ranged from 1390 to 1399, and the other from 1368 to 1381. The market did in fact have its first 20-point bounce from 1391 and, subsequently, larger ones from 1381 and 1375, consistent with the two designated target zones.
The last 4-day rally went from 1375 to 1409 (Point & Figure does not take fractions into consideration). As of Friday, that rally appeared to come to an end, fulfilling a projection which was made of 1410-1412. With another week of potential decline into the low of the 20-wk cycle, it is possible to roughly guesstimate projections for that low. I say "roughly" because the short-term topping pattern may not be completed until Monday and this could affect the P&F count, but probably not the Fibonacci projection.
There are two Fibonacci zones which stand out: the one mentioned above of 1368-1381, and another which ranges from 1354 to 1362. Best to just see how much weakness can be generated over the next week. When the short-term top is complete, we can refine the projection with P&F counts.
We would be getting ahead of ourselves if we tried to determine the size of the rally which will come after the 20-wk cycle has made its low. Nothing reliable can be established at this time.
Breadth
Short-term tops are preceded by a weakening of the advance/decline and there was evidence that we were approaching a short-term top by the fact that declines outnumbered advances over the past 5 days. This has affected the NYSE McClellan oscillator and it has now gone negative. (2/25 Newsletter)
The reason for these various quotes from the last Newsletter is to show that stock market moves are predictable and not random. Will there be an alarm going off precisely when reversal time has arrived? Of course not! The warnings are of a more general nature but when they occur, the investor can assume that a turning point is about to happen, and that being in denial or ignorance can be very risky.
Along with other signs, market breadth did flash a clear warning that we had arrived at a top. As stated above, the McClellan oscillator had not only gone negative, but it had given a significant signal of negative divergence just prior to doing so. What about now?
Because of the nature of the correction, the NYSE McClellan oscillator went to a deeper oversold position than it did in the June low. It has since rebounded sharply in the last 4 days and retraced close to the "0" line. More often than not, this is when an oversold rally ends. As the decline resumes, if the SPX makes a new low or simply retraces to the vicinity of its recent lows, the McClellan oscillator will almost certainly show strong positive divergence on the move. This is the pattern that normally takes place when a cycle has reached its low point, and it is what I expect on about 3/19.
What about the longer term? At the beginning of this article, I mentioned that the NASDAQ had done a better job of resisting the decline when compared to other indices. If you also consider the pattern that is being made by the McClellan summation index, you can already detect signs that this correction does not appear to be severe enough to indicate that a major top has been made!
The new highs/new lows index is giving us pretty much the same picture. It takes a long time to reverse the kind of strength that has been exhibited by the stock market since 2002, and there are still no red lights flashing and suggesting that the bull market is over. It could be a different story if we make a new high in the next few weeks.
Last time, under "Other warnings", I mentioned the pattern behavior of GE, the OEX and the NDX. I have already mentioned that the NDX appears to have reverted from a position of negative divergence, to one of being slightly positive. As of today, GE has yet to reverse its downtrend, and this could be a sign that more basing action is required before we can resume the uptrend. It seems to fit with the possibility that the correction will last a bit longer, past the March 19 date.
As for the OEX, although it had some value in predicting the recent market top, I have not studied its long-term forecasting ability. It may be that this was only an occasional and coincidental divergence from the SPX.
Structure
There was some ambiguity about the type of structure that was being made at the last market top. Like other methodologies, EW analysis usually offers several possibilities and it is best used in conjunction with other technical tools. The current market structural pattern, being incomplete, will largely be determined by the interaction of the two cycles which are presently influencing the market. We can re-visit it in another week, and (by mid-April) see if it has been clarified.
Summary
The SPX has been warning for some time that it was approaching an intermediate-term correction, but the evidence is now the strongest since the start of the July rally. This is not surprising since two important cycles are due to make their lows in late March and mid-April. (Final quote from 2/25 Newsletter!)
The intermediate correction may be coming to an end. The two dates to watch in the near-term are 3/19 and mid-April. The price pattern made by the SPX over the next month -- as well as the underlying technical action -- will determine the prospects for the resumption of the bull market.
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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