"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 SPX met its target price of 1108 on Friday. Actually it went to 1109.68, which is still in the ball park. While 1108 was the "strong" count, I mentioned earlier that there were some "weak counts" all the way up to 1118, but with the volume diminishing as we reach higher and higher levels, this price is not likely to be reached at this point -- especially with the short term trading cycle due to make its low in a few trading days.
While the volume has remained anemic, the NYSE breadth indicators, especially the A/D, have given good positive readings in support of this rally. However, the NASDAQ new highs/new lows are still barely treading water which suggests that we are not yet ready for a major move.
My analysis concentrates specifically on the SPX, but all major indexes tend to move in the same direction, and this was the case again this week as they all finished on their highs for the week.
Current position of the Market.
SPX - This week's action calls for a BUY ALERT. There is increasing evidence of underlying strength.
Short term trend:
SPX - SELL ALERT. The base projection has been reached, the market is short term overbought, and there are negative divergences observable in the short term indicators.
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As far as I am concerned, there are three things that matter the most in stock market analysis: the position of long term, intermediate term, and short term cycles. So let's review our current cyclic configuration with a special emphasis on what the next few weeks and months are likely to bring.
Long Term Cycles: The 12-year cycle bottomed in October 2002 and is still the dominant force behind the long term trend. The 10-year cycle, which is ( perhaps was) scheduled to bottom this Fall, is not nearly as dominant a cycle as the 12-year cycle, and although it has been primarily responsible for causing the recent intermediate term correction, its downward pressure appears to be waning.
Intermediate Cycles: The 9-month cycle is one of the most dominant intermediate cycles. Its half-span is probably the cause of the current rise in prices. It's next low will be due in another 18 to 20 weeks.
The 12-month cycle is due to make its low in October in conjunction with the 40-week cycle, a subdivision of the 120-week cycle.
Short term cycle: The most dominant short term cycle is the "short-term trading cycle", and it is scheduled to bottom in a few trading days.
Put all this together, and what do you get? A short term pull back, followed by an extension of the current up trend. Then another pull back into October prior to a far more important up move developing after that date. In other words, a resumption of the interrupted longer term up trend.
Using Channels and Structure to Define Market Trends:
In the chart which appears below, you can see clearly how the intermediate term correction progressed in an A-B-C-D-E pattern, instead of the A-B-C which we originally thought might be the case. As Charles Dow pointed out long ago, these are standard stock market patterns -- with some exceptions! If the 3-wave pattern does not end the correction, the 5-wave one will, depending on the prevailing cyclic structure.
The following channel analysis is also revealing:
1. The first intermediate term channel is depicted by the dashed lines. Deceleration of the trend was illustrated by the fact that prices began to bottom farther and farther away from the lower channel line.
2. At the third top, (D) we actually broke through the upper levels of the channel, thereby forming a new channel with a lesser slope. This new channel is bordered by the solid lines. Notice how prices found support on the bottom line of the channel.
3. Currently, prices should meet resistance in the vicinity of the dashed line which is the top of the first channel and has now become an "internal" trend line.
4. Because of the current strength in the breadth indicators, it is likely that we will challenge the top of the larger channel after the short term cycle has made its low.
5. Smaller channels (dotted lines) within the larger channel define the individual waves which make up the larger pattern -- another example of the fractal nature of price structure.
SUMMARY: The recent action of the stock market suggests that the 10-year cycle may be in the process of bottoming out and that it is beginning to exert upward pressure on prices. However, the cycles due to bottom in October should be a restraining influence on the intermediate trend for the next few weeks.
The short term trading cycle is due to make its low in a few trading days and should cause a temporary retracement of prices before the move extends toward the top of the larger channel depicted on the above chart.