A Review of the Past Week
The predictions which were made last week were fulfilled this week. The short term trading cycle made its low on Monday, and after reaching its stated price target of 1080, the SPX reversed and closed the week at 1101.72. The QQQ also found support in its designated target zone . All other major indexes followed suit and closed the week near their best levels The Advance/ Decline and the New highs/New lows also improved, with the McCLellan Oscillator back in positive territory by Friday.
Last week, I had also stated that, structurally, we were probably describing a pattern that was the reverse of what occurred in the last up trend. While not exact, it was very similar. Both trends were a two-phase pattern consisting of a long first phase and a short second phase. The last phase of a move is normally the one in which accumulation or distribution takes place and determines how far the next trend is likely to go. We now have some clear projections for the up trend in progress that will be discussed a little later.
As you can see on the next chart, 1080 marked the bottom of a descending channel and 1101 is at the top. By the time prices got there, the short term indicators were overbought and needed some relief. We have marked time for 3 days just under the trend line in a very narrow range. We may be in a position to break through right away, or more of a pull back may be needed. Friday was the last trading day of the month and some portfolio adjustment took place which made price action somewhat artificial.
Current Position of the Market
SPX - Sell. A confirmed sell was given on 3/10 and re-confirmed after prices failed to penetrate the former highs..
Short term trend:
SPX - Preliminary buy signal. This will become a confirmed buy when we close outside of the down trend line.
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Since we have established that the intermediate trend is down, we should be realistic and expect that this will only be a rally in a down trend. Indeed, the most optimistic projection still falls short of the former high.
A 50% retracement of the previous decline would be reasonable and take us back up to 1123. The minimum Point and Figure projection is a move to 1119 and this could happen quickly after we break through the trend line. The next reasonable target would be 1126 which also happens to be a Fibonacci projection, thereby giving it good credibility. There is an even higher potential price target, but it will be discussed only if the rally develops unusual strength.
It must be remembered that projections, even when based on time-tested methods, are only potentials which may or may not be realized. Their fulfillment needs to be confirmed by market action.
After this rally comes to an end, the next down trend is likely to make a new low. Ideally, the next 40-week cycle is due to bottom in October and this coincides with the low of the yearly cycle. It is probable that this will also mark the end of the 10-year cycle. Given this cyclic outlook, it is understandable that the intermediate trend should be down and remain down until October. But this is still in the future. We should concentrate on the rally at hand.
Certain key stocks and industry sector averages should be analyzed periodically to see if they are trending in the same direction as the overall markets. In a long term bear or bull market, all are likely to show confirming trends. This is the premise behind the Dow Theory whereby the action of the Industrials and the Transports are compared to see if they confirm each other's trend. As you can see on the chart below, it is clear that today these two indices are widely diverging, with the Transportation Index being far stronger than the Industrials.
GE is also strong relative to the market. Citicorp (C), another key stock, is beginning to stabilize after a good deal of weakness, as is the XBD, the Securities/Brokers index. The QQQ is still a little weaker than the SPX, while the semi-conductors and software segments are quite a bit weaker.
What we get from the above is that we are not in a uniform down trend. If GE and the Transportation index were beginning to join the rest of the indexes, we could conclude that the bear market has resumed. But this is not the case, although, if there is any kind of climactic selling in October, they will undoubtedly show some temporary weakness in concert with everything else.
Apples, Oranges and meaningless data
Many analysts are fond of comparing past market behavior to today's in order to determine what the future will bring. This is largely an exercise in futility. Cycles are the primary influence behind stock prices. They affect collective human psychology in some mysterious way that our left brain does not comprehend but can observe. Since there is a constant interaction between cycles of various periodicity, it is highly unlikely that two periods of history will duplicate themselves exactly. Even very long cycles such as the 40-year cycle which have the biggest impact on prices will tend to create historical patterns which are not similar because they are being influenced by even larger cycles. Therefore trying to compare today's action to some past period of history will undoubtedly result in incorrect analysis.
It is also largely meaningless to mix fundamental and technical analysis. Technical trends include fundamental forces. Long cycles especially have an impact on economic and social conditions. Even the 4-year cycle, a relatively short-term cycle, tends to regularly bring about at least an economic slow down if not an outright recession when it makes its low. And how many times have you heard it said that the stock market is a discounting mechanism? Today's fundamentals, by the time they have become obvious to everyone, have already been discounted by the stock market and are no longer worth considering in one's analysis.
SUMMARY: The short term cycles have bottomed and turned up, causing a reversal in price. The up trend could last 3 to 4 weeks and higher prices are anticipated. But with the intermediate trend being down, this is only expected to be a rally in a down trend.