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-yr cycle is approaching its mid-point and some of its dominant components which are topping should soon restrain the bullish effect of the 4.5-yr cycle which has just made its low and is now in an uptrend. This could lead to another period of consolidation in 2008 with an eventual bull market top in 2009-2010.
SPX: Intermediate Trend - With the 4.5-yr cycle making its low in August, the intermediate-term trend is now up.
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 period of consolidation which came after the 4.5-yr cycle made its low on August 16 came to an abrupt end last week. The Federal Reserve's decision to cut both the Fed funds and the discount rates by 50 basis points caused a two-day buying and short-covering frenzy in the equity markets. The move has provided a strong continuation pattern to the one which began on 8/16 and confirmed that the long-term bull market has resumed.
On Wednesday, the SPX reached 1538.74 which was less than 20 points from its July '07 and 2000 all-time highs, but the NDX outperformed it by coming relatively closer to its July recovery high. All other indices also joined in the surge. The Russell 2000 is still lagging, but this should not be surprising; after all, it surpassed its 2000 high way back in October 2005 and shot straight up into July of 2007. Long-term, this makes it much more overbought than some of the other indices and consequently less attractive to investors.
Also as a result of the Fed's action, the US Dollar made new lows, and Gold and oil made new highs.
It is not possible to find signs of weakness on the following chart of the daily SPX (chart courtesy of StockCharts), either current or impending. With last week's action, the index has returned solidly above both the 200 and 50-day MA.
I have drawn the channel which now defines the present uptrend. Another move up should take it to the top of that channel where it will find resistance leading to a short-term correction. As we will see, this will pretty well match the cyclical pattern anticipated for the weeks ahead.
Both momentum indicators, RSI at the top and MACD at the bottom, are in uptrends along with the chart and give no indication of diverging from the price.
The weekly chart is equally bullish. The SPX is now moving toward the top of its channel and is approaching its recent July high of 1555, which is also the all-time high reached in 2000. It is expected to rise above that level shortly.
The momentum indicator at the bottom of the chart is still oversold and the thick line has yet to turn up but it normally takes about 6 weeks to do this, and now the thin line has clearly broken above it and into an uptrend. If past performance of this index repeats itself, it should now rise from an oversold to overbought level before we can expect an intermediate term top.
The 4.5-yr cycle low has now been confirmed and, with a short-term low occurring on 9/10, 5 weeks later (5-wk cycle low), it still looks as if 8/6 was the bottom of the 20-week cycle.
If the stock market continues to follow the decennial pattern in which bull markets tend to correct in their 7th year and resume their uptrend into the 9th, we should perhaps assume that the long-term trend will now continue for another couple of years before a major top is formed. Generally speaking, this is true, but the decennial pattern is only an average of what has taken place over the past 100+ years. Every decade has its own characteristics and, based on the present cyclic configuration, I see the need for another correction taking place next year as the 6-yr and 2-yr cycles make their lows. Also, while cycles play an important part in determining the basic stock market rhythm, fundamentals have an impact on the amplitude of cycles. It has yet to be determined how much of an effect the evolving sub-prime and resulting credit crunch crisis will have on the economy and whether or not a recession can be avoided entirely. Since the risk is already present, the longterm cycles which are bottoming next year may be exacerbated by a weak economy.
But this is long-term stuff! Let's see what is likely to happen next week. In the last newsletter I wrote the following:
Looking ahead, the market will have to contend with two cyclic factors. The first is that there is a nest of short-term cycles occurring in the 3rd week of this month, and the second is that the 12-mo cycle due about October is in the process of making its low, which is probably the main reason why the short-term cycles are having such an impact on prices. This would tend to signal that additional consolidation for the market lies directly ahead. However, we cannot discount the impact of economic factors. If the Federal Reserve lowers interest rates on 9/18 or before, it will undoubtedly create a rally which could enhance the upward pressure of the cycles which have already bottomed. After the 12-mo cycle has turned up, all cycles should be in synch to push the market up to new highs.
The nest of short-term cycles discussed above are currently having their effect and should continue to do so until mid-week. What is not yet clear is whether the 12-mo cycle which normally comes in October has been cut short by the action of the Federal Reserve, or if it will still cause a dent in the uptrend in October.
Another cycle which is due in October is the 10-wk cycle which (if I have correctly estimated the date for the low of the 20-week cycle) is due about mid-month. If the 12-mo cycle has already bottomed, the effect of the 10-wk should be mild. If it has not, we should get another decent pull-back.
The initial target from the low was met at 1496. Now that we have handily surpassed that level, we should consider the next, which is about 1665. These projections were achieved by taking a count across the base established at the market lows. However, before we can move that much higher, there is a secondary target to 1582 which could turn out to be the 10-week cycle high. Furthermore, this one is confirmed by a Fibonacci ratio which projects to 1585, so we should pay particular attention to what the market is telling us as we get close to that level.
The NYSE McClellan oscillator, which is the short-term A/D indicator for that index, has remained positive for about 5 weeks. This has caused the Summation Index, its longer-term counterpart which had gone into deeply negative territory during the correction, to move all the way back to neutral. The uptrend of the summation index matches the uptrend of the NYSE Composite index and shows it to be in the early stages of an intermediate move.
Market Leaders & Sentiment
The NDX continues to outperform the SPX. Last week's rally took it very close to its July recovery high while the SPX stopped relatively lower. As long as this positive divergence continues, history tells us to expect higher prices in the broader index.
GE, whose chart appears below, also has a good record as a market leader. Last week, it made a new recovery high which should give us some added insurance that higher prices lie ahead. Note also that both the 200 DMA and 50 DMA are in an uptrend. The stock gives us a good example of how the 200 DMA acts as a long-term support line; since March of this year, it has reacted to, and bounced off, its moving average 3 times. This last bounce is particularly impressive because it has already exceeded the other two in amplitude. This is a stock which appears to be accelerating upwards. No sign of a top here!
The ISEE, an index which is based on put/call value, is currently a little on the high side, which reflects the short-term market condition indicated above and heightens the expectation of a shortterm decline directly ahead. However, the 10 DMA is still at a level which suggests that the intermediate uptrend is not at risk and that prices should move higher.
- Last week, the market gave a dramatic confirmation that a solid low was established in mid-August and that a new intermediate uptrend started on that date.
- Cycles, as well as momentum, breadth and sentiment indicators are signaling that this trend should continue.
- The SPX is currently in a short-term consolidation, but after the middle of next week the index should continue to rise.
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