"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
It appears that the stock market does not care too much how light the volume is as long as A/D and NH/NL readings continue to be positive. After a brief respite at the first projection of (SPX) 1108, we quickly moved on the next one of 1118. This has to be frustrating to both the bears and the bulls, the former because they are probably shaking their heads in disbelief that prices can simply float upward as they have, and the latter, because they would like to see a little more substance behind the move.
The breadth figures have been excellent but the McClellan oscillator has become overbought and will probably have to retrace in conjunction with a pull back in prices.
The Dow Jones Industrials and Transportation indexes are also performing well in this up trend, but the NASDAQ obviously has more work to do and one wonders how much farther prices can move up without its support. It is interesting that in spite of its poor performance on Friday, the NASDAQ NH/NL recorded some of the most positive readings in recent weeks.
Current Position of the Market.
Long Term Trend: The long term trend turned up in October 2002 in conjunction with the 12-year cycle, is still in a BUY/HOLD mode, and is likely to top out at some point in 2005.
Intermediate trend: A BUY ALERT remains in place for the SPX. Prices have not yet moved out of their intermediate downtrend channel, and more basing action will probably take place as a result of the intermediate cycles making their lows in early October.
The Short Term Trend is up, but may be topping. Because of market volatility, the short term trend is better analyzed on a daily basis. This is done in our daily market updates and closing comments.
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The 118 P/F projection was reinforced by a Fibonacci projection to 1121 . Friday's Closing Comment stated:
-- "Getting past the 1121 level right away may prove problematic.
--There is considerable resistance beginning in that area created by down trend lines and overhead supply.
--The second phase of the up trend --starting at 1095--appears to be making a 5 wave pattern with the 5th wave still to come. If this is the case and It completes at 1121/22, then we will be in for an extended period of consolidation and possible topping action.
--Additional weakness in the NASDAQ would not support extending the up trend at this time.
--The short term up trend line is currently at about 1103 and prices must hold above 1095 to remain in an up trend."
We can get a better idea of where things stand by looking at an updated chart of the SPX which was presented last week. The comments made above are clearly illustrated on this chart. I have also included a chart of the QQQ to show the marked contrast between the two indexes.
About Price projections: The most reliable projections are made with Point and Figure and Fibonacci counts. When they confirm each other, as they recently did for a move to about 1120, they make the projection more valid. But they do not tell you how quickly you will get there, and they must be substantiated by market technicals, i.e. structure and breadth.
There is no limit to the number of Fibonacci counts, since the sequence and the ratios expand indefinitely from any level, in either direction. This is where the P/F chart is of great value because the accumulation or distribution area is limited by the price action that has recently taken place and is graphically represented on a Point & Figure chart. But the "count" is not always clear and easy to discern. Market patterns come in many forms making it a challenge to decide where to start and to end. It takes a great deal of practice to develop this skill.
One has to differentiate between strong and weak counts. For example, in the recent short term move, the base showed a strong count to 1108, and a weaker count to 1118, both corresponding to a Fibonacci ratio. There is an ever weaker count still to about 1135 -- also validated by a Fibonacci ratio to 1137-- and if prices moved through the 1120 level decisively, this would probably be the next target for the move.
Price projection answers "How Far", one of the three questions that an analyst strives to answer. The other two are: "When", and " How", which are respectively answered by cycle and structure analysis.
SUMMARY: Last week's comment is still valid and bears repeating: "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 being elusive and more time is needed to decide whether the brief sell-off which occurred last week was its doing, or if it will make its low this coming week. The current short term trend is up but may be topping, and this suggests that the latter is the more likely possibility.