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 - The intermediate consolidation came to an end on 3/17. The index is now in a cautious uptrend which probably has a little farther to go.
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.
In his weekly letter, Louis Navellier gave a good account of the current market mood:
"Investors pushed stock prices higher this week after several economic reports indicated the economy is soft, but not nearly as bad as many feared... Investors are sensing the worst is behind us. And since history suggests the stock market tends to turn higher about four months before the economy, buying pressure is coming back into the market place."
The technical aspect of the market is also reflecting "cautious" optimism on the part of investors. Prices continue to move up but without much conviction. This is reflected in the advance/decline and volume figures which are fairly anemic but remain positive on balance. This type of technical pattern normally suggest that a correction is near and keeps the analyst on tender hooks.
Mike Burk, in his "Technical Market report" which is available on "SafeHaven" provides us with excellent statistics about volume, new highs and new lows. He notes that in the past few weeks, the volume and the number of new highs has been falling steadily while prices have been rising. This confirms the pattern which is apparent in the A/D, and suggests that this rally is on borrowed time. He also notes that the Money supply has been falling sharply... not a positive sign.
I have a theory that may explain this sluggishness. The Hurst 9-mo cycle was ideally supposed to make its low next week (38 weeks from the 4.5yr cycle in August), and I have been expecting a pull-back into that time frame. This has not happened! Could it be that the bottoming cycle does not have enough downward pressure to reverse prices, but is merely applying the brakes on the uptrend? It's effects would then be reflected in the poor quality of A/D and volume in the past few weeks. It also means that after next week, its upward pressure would allow the markets to perform better. We'll soon find out if this theory is valid. In the meantime, if this pattern continues, caution is advised.
Chart pattern and momentum:
There are a few positives on this chart. The index made a new high last week and, in doing so, it finally surpassed, in a convincing way, the red horizontal line which represents the high of the January rally to 1396. At the same time, it broke out of downtrend line B which goes back to the October top. However, this is a trend line of dubious validity since it is drawn across only two points. Trend line A touched three points and was more predictive of a trend change when it was broken.
There are also several negatives: For the past month, the A/D indicator has been making lower highs on each short rally. This means that fewer and fewer stocks are participating. However, it also has a pattern of higher lows, which implies that while buyers have been more and more reluctant to step in, the sellers have not yet been able to take control of the trend.
Another negative is that the momentum indicator has been trading in the overbought zone for a couple of weeks. There is no time limit on how long it can stay there, but the lack of enthusiasm in breadth support tells us that it won't be for much longer, unless the A/D pattern improves.
Note that the price is drawing close to the red dashed line. I believe that this represents the down channel from October. Quite often, prices tend to rise to a point just outside such a channel before correcting. The blue vertical line (which will be explained under "Cycles") may represent the approximate time when this will take place.
A little different perspective can be drawn from looking at the weekly chart. Both indicators are still trending up and not overbought. In fact, the higher one (MACD) is still oversold and its histogram still rising. Under "projections" I will discuss target levels for this rally. They correspond approximately with the lower part of the long-term trend line which would offer strong resistance if prices move up to it.
For the QQQQ, the same trend line resistance would come at about 50.00.
Where is the 9-mo cycle? It is probably either going to be a non-event or will bottom late. It would not be the first time that the Hurst 9-mo cycle has had little effect on the market. I have proposed a theory ("Overview"), but only the future will tell us if it is valid.
There appears to be a fairly consistent 35 trading-day rhythm in the market, plus or minus a couple of days. This is represented on the chart by light blue vertical lines. It is more likely to be a CIT (change in trend) phenomenon than a true cycle. Since the end of its present phase is fast approaching, it's very possible that next week will be the top of this rally.
Adding to this possibility is the fact that some short-term cycles are due at the end of next week.
There are 3 potential SPX projections to the upside for the end of the rally. The first was 1423 and was reached on Friday. There was an intra-day pull-back after that projection was reached, but nothing serious so far. The divergences are there, but we'll have to wait until Monday to see whether this turns out to be something more significant.
By reaching that level, the SPX had to go decisively beyond 1396, which it had resisted doing until last week. This triggers two other potential projections to higher levels: 1438 and 1470. At a maximum, if internals improve, the index could reach 1480.
The overbought condition of the market and the poor performance of the A/D, volume, etc... imply that we could have a reversal at any time to relieve the unsupported price excess. The higher levels, if reached, could well be the top of the intermediate trend which started at 1257. The indices could then face a decline into the Fall, where the 1,2,3 and 6 year cycles are due to make their lows.
Breadth continues to limp upward. The A/D oscillator that is shown on the chart above plainly demonstrates the loss of momentum of that index. However, it has remained positive and that has allowed the McClellan Summation index to continue improving, albeit only slightly, but enough to finally turn it positive. (Chart below courtesy of StockCharts)
The MACD of daily A/D, which is the indicator shown above, and which is very similar to the McClellan oscillator, is providing a sharp contrast to the momentum oscillator, which is overbought. This is not a good technical picture. It is negative, and should not lead to a continued extension of this rally for very long without a correction setting in.
The new highs/new lows indicator is telling the same story.
Market Leaders and Sentiment
In the last letter, I asked "Which are we to believe, GE or the NDX?". The answer is: "Perhaps both!"
GE has done very little since its dramatic decline of a few weeks ago. It looks as if it requires more consolidation and basing action before it will be in a position to begin another intermediate term rally.
On the other hand, the NDX has been leading the SPX higher in this rally. Until this stops, it is likely that the short-term trend will continue to be up.
So, perhaps the NDX is telling us that there is a little more to the rally, but GE says that more consolidation will be needed before we can mount another assault on the highs.
Considering the fact that there are some important cycles bottoming in the Fall, I would say that this is probably a fair assessment of what lies ahead.
By rising above its 2/1 high of 1396, the SPX has triggered some higher projections. These could mark the target for the current rally as well as the end of this intermediate term rally from 1257. Another period of consolidation would then be required into the Fall to satisfy the longer cycles bottoming in that time period.
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