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 - Election years that fall in the 8th year of the Decennial pattern call for consolidation in the early part of the year followed by a strong finish. But the 6-yr cycle which is scheduled to bottom in late Summer/early Fall could also play a restraining role, followed by an eventual bull market top in 2009-2010.
SPX: Intermediate trend - an extended intermediate-term consolidation is in the process of ending and may already have ended.
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.
Market psychology appears to have changed for the better. After GE's disappointing earnings report there was a big sell-off, but it was short-lived and the indices quickly regained their footings and started a new short-term uptrend. By the end of last week, most were challenging their early February highs. This high marks the top of a three-month base with a range of 140 points for the SPX. So far, only two indices have traded above: the Dow Industrials and the Nasdaq 100, but the others could easily join them if the current rally extends into next week.
Does this mean that we have seen the low of the correction? I think it's fair to say that we have seen a temporary low which will hold for at least for a few more weeks, but it may be challenged in the Fall. We will soon know if the uptrend can be sustained. Ideally, an intermediate-term cycle is still due to make its low--unless it did it early and is the cause of the recent market strength.
If a genuine reversal is in progress, it is most likely caused by the 8th year of the Decennial pattern to which I have alluded repeatedly. I will show (once again) the typical pattern of the Dow for the past 100 years during an election year which falls on the 8th year of the decade:
Here is a chart of the Dow Industrials to-date so that you can see the similarity, so far, of the bottoming pattern on the two charts. But do not carry that resemblance into the future, because it could evolve in a very different manner.
Chart pattern and momentum:
You can see on the following chart that the SPX has now moved into the upper half of its down channel. But it faces resistance where it closed last week. First, there is the former high of 1396.02 made on 2/4. Next, it is up against the lower trend line of its long-term channel. Third, it is approaching the underneath of a short-term trend line. These, by themselves, could put a temporary lid on the current rally but, as we will see later, there is also a short-term cycle due to bottom next week. Therefore, odds favor at least a short pull-back before the index can challenge its intermediate down-trend line. Other cycles can also pull it down in the near term.
Finally, the oscillators both show negative divergence, with the momentum oscillator overbought. Of course, these are only warning signs that the uptrend could be reaching a top, and the trend lines on both the price chart and the oscillators will have to be penetrated before we can get a confirmed sell signal.
I have already mentioned that the seasonal pattern may have had a hand in the price reversal of the past six weeks. My expectations were that the correction could continue into the low of the 9-mo cycle which is ideally due in the first 2 weeks of May and, unless it bottomed early, I still expect it to be a factor. Its anticipated low is marked on the above chart by a vertical red line. Note that there is also a faint blue line right next to it. This denotes an approximate 35 trading-day pattern which has a fairly good record of consistency and which is due at about the same time.
The 6-wk cycle which was expected next week bottomed early and helped set up the rally.
Also next week, the 5-wk cycle is due either Tuesday or Wednesday. This could give the SPX an occasion to correct before trying to proceed higher.
Farther down the line, the 6-yr cycle, and its components of 3,2, and 1-yr, which should bottom in the early Fall could still be a factor in preventing the market from resuming its long-term uptrend before it has additional consolidation.
If the current low of the correction remains in place at 1256.98 and the SPX does break out of its base for another intermediate uptrend, we can estimate that it should rise to about 1475 before there is a need for further consolidation.
My remark made two weeks ago will have to be tempered by the possibility that even if the index rises above 1396, it may have to pull-back into early May before attaining that projection.
Short-term, the SPX was given a target of 1392 for the current rally top. On Friday, it went slightly beyond, to 1395.90 before pulling back. Should it decide to move higher, the next level of resistance would be about 1420.
The McClellan Summation index is moving back to neutral but is still negative. It also appears to be losing a little momentum in relation to price. Conditions will change if we keep getting short-term strength in the NYSE A/D but for now, it is still a neutral or basing pattern.
This, along with the negative divergence showing in the daily A/D indicator in the SPX daily chart above, would suggest that more consolidation may soon take place, especially with the 9-mo cycle ostensibly still due to bottom over the next 3 weeks.
Market Leaders and Sentiment
Which are we going to believe? GE which quickly rose to the top of its down channel and then crashed just as fast back to its low, or the NDX which is slightly outperforming the SPX (above, courtesy of StockCharts)? I think that we should keep an eye on both of these for a while, and the other on the market. Short-term, I want to see if the 9-mo cycle will have any effect. Longer term, I am more concerned about the larger cycles bottoming in the Fall.
Nevertheless, the sentiment indicators continue to be bullish, so the odds still favor that some sort of an intermediate bottom has been, or is being made. The only question is: how dynamic an uptrend will we get in the next few weeks?
The short-term rally which started at the 1257 bottom continued last week fueled in part by a short-term cycle which bottomed early, and perhaps, in addition, by option expiration which prompted heavy short-covering. But an impending short-term top is a real possibility with another retracement into early May if the 9-mo cycle low is still ahead of us.
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