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. Some additional short-term consolidation is probably needed before the former highs are challenged.
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
The intermediate uptrend which started on 3/24 pushed higher last week with all major indices participating in the advance and overcoming their recent short-term top. The only laggard was the Dow Transportation index. The NYSE Composite displayed the greatest strength, and came within a few points of its February all-time high. It may also be worth noting that the indices of several foreign countries reached new bull market highs by the end of last week.
The cyclic configuration and the geopolitical developments of the past two weeks which led to a sharp rise in the price of oil provided the market with an opportunity to display weakness; but its inability to retrace more ground before resuming the uptrend is a sign of strength which could lead to new bull market highs by the end of April or early May.
What's Ahead?
Cycles
I have consistently stated in the "Market Position" above, that the 12-yr and 10-yr cycles which made their lows respectively in October 2002 and August 2004 are still in an uptrend. The continuing bull market seems to bear this out. One way to measure the strength of the long-term cycles is by observing the behavior of the 20-week cycle. This cycle is an excellent gauge of market health. When it peaks before its half-span, it displays left-translation and indicates that the longer cycles have begun to exert downward pressure. When the top comes after its halfway point, this is called right translation and it tells us that the longer-term trend is still pointing up, as is the case now.
The last 20-week cycle reached its high point in late February, only two weeks before its low of 3/14. This is an indication that the longer term trend is still healthy and the rally since the low has proved it. The three cycles that lay ahead of that date -- the 9-week, 6-week and 9-mo (all of which were collectively scheduled to bring a correction into mid-April) -- were expected to provide the conditions for a test of the lows before the uptrend could resume, but this test has taken the form of a brief interruption in the uptrend. With the 9-week now out of the way, the 6-week and 9-mo are only expected to bring about another short-term pull-back, and then it will be clear sailing to new bull market highs.
It is evident that the current 20-week cycle has established its dominance over any other cycle that lies ahead in the near term. It should reach its halfway point toward the last week in May. Since there is a normal dip into the 10th week, the extent of that retracement (as well as the rally which will follow it) should give us a clue about how much strength remains in the bull market. Early June carries the best probability for a top. Longer term cycles bottoming in the late Summer to early Fall should have a significant impact on prices and bring about a correction more severe than the one of February/March. Whether or not June 2007 proves to be the bull market high will be determined by the following rally into the end of the year. Cycle-wise, 2008 could prove more difficult for the bulls than 2007.
The following weekly chart of the SPX (courtesy of Big Charts) is the simplest way to demonstrate graphically that the long-term trend is still rising. The up-channel is still intact, and the index was not even able to challenge the bottom trend line during its recent retracement. Now, after rebounding sharply, it is on its way back to the top of the channel once again.
The MACD indicator shows that there was only minor divergence at the 1461 top. The next top is likely to tell a different story, but it will take some doing to bring this indicator back down to a negative reading.
Projections
We can already project that the next intermediate-term high for the SPX -- which could also prove to be the bull market high -- will be between 1498 and 1520. These are levels to keep in mind as we approach them. They have been determined by Fibonacci measurements, but there is at least one Point & Figure count from the base which projects to 1498. Further confirmation and refinements to this basic target zone will be made as the current rally progresses and enters its final phase.
Short-term, the SPX should find a top on Monday and begin to retrace into the low of the 6-week and 9-month cycles. Prices are not likely to exceed 1450 before the retracement begins.
Breadth
The longer-term picture of the McClellan summation index is not very bullish. It made its high in January 2007 and has made a succession of lower highs and lower lows since then. It is currently in an uptrend which matches the price pattern since 3/14, but the odds that it will overcome its former high are not very good. If it fails to do so, it will be flashing a warning that we are be approaching an important top. This is supported by the cyclic configuration which calls for a high to be made in the next couple of months.
The McClellan oscillator (the shorter-term indicator) is currently showing negative divergence, suggesting that a short-term top is at hand. This is reinforced by the hourly A/D which has already lost the upside momentum which was generated a week ago Friday when the 9-week cycle made its low.
Market leaders
The NDX price pattern is in synch with, and shows no divergence from, the SPX. Both indices overcame their recent short-term tops by about the same margin. This implies that there should not be an important top directly ahead (next couple of weeks). GE, however, did not participate at all in last week's rally. I am not sure of GE's value as a very short-term indicator, but the stock is beginning to diverge significantly from the SPX on an intermediate basis. Like the summation index, this suggests that unless we see some improvement in short order, there will be trouble ahead and in the not too distant future.
Structure
Elliott Wave experts see two structural possibilities for the short-term, both of which should lead to a completion of the intermediate pattern for the SPX. The cycles that lie ahead could support either view.
Summary
The intermediate term trend which began on March 14 is expected to continue, with another short interruption taking place over the next week. It should reach its peak by early June in the vicinity of 1500 on the SPX, and be followed by a correction more serious than the current one lasting into late Summer/early Fall.
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. You may also want to visit the Market Turning Points website to familiarize yourself with my philosophy and strategy. Just click on the link below.
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