"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
A Review of the Past Week
The dichotomy of the markets continues. The selling in the semi conductor segment had a negative effect on the NASDAQ which was down 63 points for the week, By contrast, the SPX was down less than 12 points, and the Dow 73. Since most of that weakness occurred on Friday, it is probable that it was in part due to the expiration of options. If this is the case, we could get a bounce first thing on Monday.
Also making this weakness suspect is that 4 days out of 5 this week, including Friday, the NYSE advance/decline ratio was positive and the new highs surpassed the new lows every day of the week, with the strongest number coming on Friday. Of course, the same thing cannot be said of the NASDAQ breadth figures which were just the opposite.
It should also be noted that two very important segments of the market were not affected. The Banking sector was basically unchanged, and the Real Estate index was up for the week. No inflation and higher interest rate worries there!
Current Position of the Market
For now, the Intermediate term trend remains in the same position:
SPX - Bullish warning. A confirmed sell was given on 3/10/04 The bullish warning was given on 5/17. So far, we have failed to give a preliminary buy signal. The SPX would have to close above 1150 to give a confirmed buy.
Short term trend:
SPX - Bullish warning. A confirmed sell was given on 7/01. A bullish warning was given on 7/08.
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Cycles: The window of opportunity which had existed for the markets to surpass their recent highs may have closed for now. A number of short term cycles were scheduled to bottom between the end of this past week and extending into the end of the month. This could keep the market at bay, preventing any real strength from developing, but not necessarily bringing about much more weakness. However, we will next have to contend with the 40-week cycle low due in early September, and then the yearly cycle low in October. The 10-year cycle remains the wild card depending on when it decides to bottom. For now, it appears that it has taken control and that we are in the process of extending our correction.
Projections: Last week I wrote: "...but a further short term decline to 1100 would not be surprising and might even be preferable." The target zone is actually between 1095 and 1100, and with the deeply oversold short term condition and the wave structure of the SPX and DOW -- both of which are identical -- a reversal could take place at any time.
It is also more than likely that the higher price targets indicated by the base accumulation patterns will not be filled. The most reliable P/F projections are the phase projections. The larger zones of accumulation at tops and bottoms often fail to reach their full potential unless they are clearly re-confirmed by a phase pattern.
Structure: In spite of the relative strength of the SPX and DOW, the short-term wave structure that they are currently forming is probably a negative. An impulsive 5-wave pattern - which this appears to be - is normally a subdivision of a larger pattern, either an impulse wave of a larger degree, a zig-zag, or the terminal wave of a flat. Whichever this turns out to be, this means that after a rally we are likely to see more weakness as the pattern completes itself.
Momentum: The charts of the NASDAQ and of the SPX appear below. They clearly illustrate the contrasting technical conditions of the two averages. They also show a severely oversold stochastics oscillator, indicating that at least an oversold rally is near. However, both MACDs suggest that some repair work will be necessary before attempting a viable up trend. This seems to fit the cyclic map for the rest of the month.
By putting the SPX under the microscope and analyzing the hourly chart, we see a clear pattern that is not apparent on the daily graph.
a) It is fairly obvious that we are making a 5 wave pattern. I have labeled the main waves (1), (2) etc....as well as the smaller fractals 1,2,3.... It also appears that wave (5) is not yet complete and probably requires a 4 and a 5 for completion, but not necessarily, as frequently the final wave 5 is missing in short term moves.
b) The oscillator patterns which form during a wave (5) are appearing in the form of an oversold stochastics and positive divergence on the MACD. We must now wait for the MACD lines to turn up and cross before we can experience a rally. This would give time for the 5th wave to complete itself, and for prices to reach the target area mentioned above. Although a "Bullish Warning" signal is justified, we are probably still a couple of days away from a short term trend reversal.
c) Please, also note the non-confirmation of the move this past week by the A/D index (at the bottom of the page). Another justification for our "Bullish Warning" signal.
SUMMARY: In just one week, the picture has turned more murky instead of clarifying itself. While the NASDAQ appears in the process of catching pneumonia, the SPX and DOW have not even gotten the sniffles as the NYSE breadth indicators continue to be positive! Are they just marking time until the bears are done with the tech stocks and decide to take on the other segments of the market? A short-term rally beginning in the next couple of days seems a near certainty. But how much strength will it bring? A rally which does not bring much strength can leave the market vulnerable for a bigger sell-off. Given the current structure and the cyclic map between now and October, the odds favor an extension of the correction into the Fall.
Sentiment Indicators: During the 2003 rally, the VIX and the Investment Advisors were flashing strong sell signals while the Insiders were selling at a rate of 40 to 1. Recently, the Put/Call ratio and the NYSE specialists and members have given strong bullish readings. All these indicators appear to have either lost the historical reliability that they once enjoyed, or they have considerably increased their lead time and become useless timing tools. In the future, it might be best to ignore them and just concentrate on the action of the market.