A 3-dimensional approach to technical analysis
Cycles - Breadth - 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 came to an end on 3/14 with the bottoming of the 20-week cycle, but it needs one final retracement before resuming the uptrend.
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 downtrend which started at SPX 1361 took place in two distinct phases, with the second one forming a climactic thrust to 1363.98 on 3/14 which reversed immediately and has kept on going up ever since. The SPX ended up the week at 1436, only 25 points from its initial drop, thus recovering 75% of its decline in only one week.
Generally speaking, all indices followed the same path with only minor variations in behavior. This quick recovery is remarkable and is an indication of long-term strength, something that I have been alluding to in past articles. It just about puts an end to the speculation that February 22 was a major top and instead, it is shaping up to be only a strong intermediate-term correction in the long-term trend, very similar to what was experienced in May through July of 2006. Of course, there are some differences and we will examine these in the next section.
This letter focuses its analysis on the three principal aspects of the stock market: Cycles, breadth and projections that are based on patterns of accumulation and distribution. When it is clear, structure can also be helpful in determining that a trend has ended and a new one started.
The decline was primarily caused by the bottoming of the 20-week cycle which made its low almost perfectly on time, only a couple of days earlier than when it had been expected. As I mentioned before, the downtrend was initially triggered by some smaller cycles. Its amplitude was pretty much determined by the degree of distribution that had taken place during the last stages of the uptrend in February.
The initial recovery was very fast, taking the form of a V-shaped bottom and, at first, it looked as if the short-term tops that had formed around 1410 would contain that recovery until the cycles that lie ahead had a chance to expand the base as they made their lows. But last Wednesday, the slight change of wording which came from the FOMC meeting was interpreted bullishly, providing the catalyst needed to overcome 1410, and triggering short-covering which extended the recovery to the next level of resistance.
This action was technically significant because if the SPX had not been able to move above 1410 by the end of last week, it would have brought about the possibility of making a double-bottom formation such as the one which took place last year at the June-July lows. But now, this opportunity is gone. The cycles that lie directly ahead (9-week, 9-mo and 6-week) are only likely to bring a retracement to about 1410, the resistance level which has now turned support. The two smaller cycles normally have very consistent phases and the low of the first one, the 9-week cycle, can be pin-pointed to the end of the month and that of the other, the 6-week, to the second week in April. The 9-month cycle is a little more flexible -- its phase ranging from 37 to 40 weeks -- and it will probably choose one of these two time frames to make its low.
For the sake of present and future clarity, it would be better to label the 9-mo cycle to which I refer as the "9-mo alternate". The primary 9-mo cycle was categorized by J.M. Hurst as a subdivision of the 18 year cycle. It is scheduled to bottom in the Fall along with the 4½ year cycle. Back testing demonstrates that this "alternate" has a similar span and about the same impact as the primary one. This double-beat has caused a lot of confusion among cycle analysts, and many who used to track it regularly -- such as Carl Swenlin of Decision point -- have given up on it.
J.M Hurst deserves a lot of credit by identifying some of the most dominant cycles which affect the stock market. But, by filling in the gaps with some of those that were omitted, we can get an even better road map of what lies ahead. For instance, none of the 3 cycles to which I refer above are part of the Hurst series. However, all have a track record which cannot be ignored.
The net effect of the 9-wk, 6-wk, and 9-mo cycles will be to cause a near term pull-back before the uptrend (which started on 3/14) can resume.
Here is a quote from the last newsletter: 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.
The top Point & Figure formation gave imprecise counts to the areas suggested by the Fibonacci ratios. The refinement came from the last phase of distribution which took place above 1398. This narrowed the projection for the low of the 20-week cycle to between 1361-1367.
A V-shape bottom such as the one which formed at the low does not lend itself to an immediate forecast of how far the initial rally can carry. One must wait for the pull-back which comes after the first up-thrust to establish valid projections for the new trend. This pull-back came after the rally had reached 1397.51, and it re-traced to 1383.63. This can now help us to establish upside targets when the upward trend resumes.
Two valid measurements can already be taken from the formation that was created at the recent low. Both measurements give us the same target: 1474. The fact that both forecasts came up with exactly the same number should give it added credibility. As is often the case, a re-accumulation level will form just before the final high, and, when it does, should give us additional clarity.
But what about the anticipated retracement into the near-term cycle lows? How far down will that take us? From a pure technical perspective, it would make sense to have a pull-back to about 1410 because this is where the break-out of the downtrend really occurred and where there is now good support. If the short-term top formation which has been building over the past 3 days is complete, and if the market starts declining first thing on Monday, 3 valid downside P&F projections can be made as a result of the distribution phase that has taken place: 1418 -1407 - and 1396. 1407 is the one which appears to be most plausible. However, I would not dismiss the lower count until we are sure that all the cycles have made their lows, especially if the (alternate) 9-mo cycle decides to bottom with the 6-week cycle in the second week of April instead of at the end of March.
Combining price projections with cycle lows is about as precise as technical analysis can be. But there is always the possibility for some variation to the most probable time/price target. Right now, for instance, based on some esoteric measurements, we could have a more significant decline during the next 2-3 weeks than what has been envisaged above. So I am going to keep an open mind, and let the market tell me how far it wants to retrace before resuming its uptrend.
Note: Please be aware that if the SPX shows some strength on Monday, it may materially affect the projections given above.
As you might expect, the A/D should have been very positive in the recent rally, and it was. The McClellan oscillator went from a deeply oversold level to deeply overbought. This has turned up the Summation index, but not enough to put it back in a strong uptrend. In fact, since the Summation index requires that the McClellan oscillator remain positive to continue moving up, I suspect that the pattern that it will make over the next few weeks will signal a more important top (at 1474?) than the one that was just made at 1461.
Short-term, the A/D lost its upside momentum two days ago, and is now suggesting that we have arrived at a short-term top.
GE won the award for early warning that a top was coming by starting to decline several days before the other indices. It made its low on the same date as the others, on 3/14, and has been a strong short-term uptrend ever since.
The NDX was not as good a forecaster of the top since it was pretty much in synch with the SPX. It too made its low on 3/14 and has been rising; but in the last couple of days some negative divergence to the SPX has appeared. This confirms the picture that the short-term A/D is giving us: A short-term reversal is imminent!
I am only going to comment on structure when it clearly identifies highs and lows and not in the middle of moves. For instance, it is noteworthy that the SPX has probably been making a short-term ending diagonal over the past couple of days. This confirms the patterns made by the A/D and by the NDX. The ED may already be complete, or it may require one more little push up to finish its 5th wave. Either way, everything suggests that early Monday morning we will see a reversal to the downside.
When the decline from 1461 began, it was not clear if this was an intermediate-term or a long-term top. The recent strength suggests that it was only an intermediate top, and that the high of the bull market is still ahead of us, but probably not too far away. A marginal new high for the SPX would probably finish the job and be followed by a decline into more important cycle lows in the Fall. Best price guesstimate for the high at this time is 1474.
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