A 3-dimensional approach to technical analysis
Cycles - Structure - 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
A Review of the Past Two Weeks
The price action of the past two weeks has been corrective for all equity indices, reflecting only moderate selling pressure. This has been substantiated by light volume and moderately negative breadth figures.
Oil, gold and the US Dollar have also been confined to a fairly narrow price range.
Current Position of the Market
SPX: Long-Term Trend - There is a slight chance that we may currently be seeing the top of the bull market, but a much better chance that it will not come for several more weeks.
SPX: Intermediate Trend - The action of the intermediate trend for the past 2-3 weeks has been brief and shallow and can either be designated as a consolidation or a mild correction. Either way, it appears ready to come to an end in early to mid-January.
SPX: Short-Term Trend - The short term trend is nearing its price and time objective. See below.
Because of market volatility, the short-term trend is better analyzed on a daily basis with the help of hourly charts. This is done in our daily market updates and Closing Comments.
Daily Market Analysis: If you would like to receive an explanation of how I arrive at buy and sell signals and sign up for a free 6-week trial period of daily comments, please let me know at email@example.com.
The last newsletter stated: The bottoming of the 9-month cycle is still expected to produce a decline into about mid-January, but since its phase length is not always exactly 38 weeks, it could come a little before or a little after. This will be determined by the amount of distribution which is currently taking place at the top, and when that distribution target has been reached. Right now, we can probably expect a 35 to 40 point decline, and this will be fine-tuned after it has started.
The market action for the past two weeks has not given me any reason to change this prognosis. The favored reversal date is 1/9/06 and the favored price objective zone for the low of the SPX is 1237/1242.
The objective of technical analysis is to determine as accurately as possible the "when" and "how far" of a trend, i.e. in what time frame it will reverse and at what price level. Ideally, this objective should be attainable for any trend irrespective of its length, but is easier to predict for the short and intermediate-term trends.
The stock market is multi-faceted, and the analyst who masters more than one methodology has a distinct advantage because he will discover that all tend to support and confirm one another, and that the "when" and "how far" are really two sides of the same coin.
Momentum studies are essential because trends usually decelerate as they enter their final stages. This is because the ratio of buyers to sellers changes. It is noticeable on a price chart and even more so on momentum oscillators. It is also apparent in breadth statistics.
In the last newsletter I provided charts that showed deteriorating price momentum typically forecasting the end of a trend. The charts that I am including in this newsletter do not yet show price momentum deceleration, but they do show that the indicators have become oversold -- a sign that we are approaching the end of the correction. However, the deceleration pattern is clearly evident in the advance/decline oscillator in the form of positive divergence.
The realization that cycles and their inter-action -- whatever their causes -- are an essential and fundamental driving force behind the stock market's fluctuations is extremely helpful.
A short-term cycle of approximately 11 weeks in length made its low in early December. This cycle is very dominant, and it is preventing a larger cycle, the 9-month cycle from exerting more downward pressure on prices as it reaches its bottom in the near future. This is one of the reasons why the current correction has not been more severe. Other reasons are that the 12-year and 10-year cycles are still in their up-phases. Logic tells us that after the 9-month cycle makes its low, it will provide a lift in combination with the other 3 cycles mentioned above, but this will be offset to some extent by the very dominant 4-year cycle which should bottom late in the year. At some point, price equilibrium will be reached and the market will begin a decline which will represent the bear phase of the bull-bear cycle which began in October 2002. Then, the next bull-bear cycle will begin, but it is likely to be considerably different than the one we have just experienced, because much longer cycles will play a more important role and cause a far less benign environment. I will discuss all this in a Special Report at some point in the future.
Another tool of inestimable value is the Fibonacci ratio. Like cycles, it seems to be part of the fabric which makes up our physical universe and its effect can be noticed throughout the space/time dimension. In the stock market, it can be used to calculate the "when" and "how far" of a trend. When the trend projection is substantiated by a Point & Figure count, the odds are substantially increased that a reversal will occur at that price level.
Both Point & Figure and Fibonacci projections coincide to give us a price zone between 1236 and 1242 where the current decline in the SPX is likely to end. The QQQQ projects to 39.50/40.00 Time projection puts 1/9 as the most likely date for a low, and since this holds true for the SPX, QQQQ and the DOW, that date plus or minus a couple of days should be closely watched for a reversal.
Finally, the judicious use of trend and channel lines is necessary to organize the market's behavior into a picture which makes sense and can be communicated to others. Reversals should always be confirmed with the breaking of the trend and channel lines which define the current trend. I have drawn these on the charts of the SPX and NDX which appear below. We will re-examine those charts in the next newsletter.
Oil, gold, and the US Dollar all appear to be in various stages of either a consolidation or a topping pattern of an intermediate-term and possibly a long-term nature, and do not appear ready to break out of these patterns at this time.
In the last newsletter, I spent more time analyzing gold than I normally do. I will follow up by making a few more observations:
Bullion has the habit of ending an important trend in a climactic fashion. This is obviously what happened recently. Whether this represents an intermediate or long term top is not knowable at this time. Normally, the XAU leads bullion, and if it goes for the top of its projection zone of 127-139, this would intimate that bullion is going to go higher than its recent climactic top. But the XAU is still very overbought on its daily and weekly chart, and should be ready for a significant time/price retrenchment instead of moving higher. Also, this past week, the gold COTs increased their short positions slightly, and they were already at a high level.
Conclusion: We need more time to clarify the current position of gold.
After reaching its initial pull-back projection of 56, Oil was expected to make a base which would eventually carry it to new highs, or to expand the current formation into a very significant top. Like gold, it is too soon to know what it is doing, but it is interesting that both oil and gold have the potential of being in the process of making long-term tops.
The daily charts of the SPX and of the QQQQ presented here will be analyzed simultaneously because they are essentially at the same stage of progression.
Note that the momentum indicators (MSO) of both indices have become oversold, but are not showing divergence. However, the A/D indicator is showing positive divergence to price, and this is normally a prelude to a reversal.
The small vertical line under the price indicates the projection zone for both indices. This is my best estimate of where a price reversal should occur.
I have also included an hourly chart where it is easier to see the pattern that the correction is making and to draw channel lines.
SUMMARY: The correction which began in early December is coming to an end. The best time frame for a reversal to occur is in the first two weeks of January, with January 9th as the preferred date. This reversal should initiate the final leg of the bull market phase which began in October 2002.
I want to wish all my readers a Happy, Healthy, and Prosperous New Year!