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
After a period of consolidation, the markets started up again and all indices made new bull market highs, although the Dow, which is the weakest of them all, just barely managed to get above 11,000 causing CNBC to strike up the band in celebration. Alas, the Industrials could not stand the rarefied atmosphere and had to move back down to a more comfortable zone, closing the week at 10,960.
Gold is going parabolic in a move reminiscent of the late 70's, and is now trading at its highest levels since then.
The US Dollar has done little in the past two weeks.
After bouncing off its correction low, oil has been moving sideways.
Current Position of the Market.
SPX: Long-Term Trend - This index has embarked on its final leg of the bull market which started in October 2002, and is approaching a high point that could be long-standing.
SPX: Intermediate Trend - The trend which started in October has now resumed and could last several more weeks, but is not likely to bring major price changes.
SPX: Short-Term Trend - The short term trend is up since the first few days of the month and undergoing its first correction.
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.
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The 9-month cycle bottomed one week earlier than its ideal 38-week span, and stopped a bit short of its target low. An extension of the rally which began in October is now under way. In the last newsletter I stated that the primary function of the analyst was to forecast the time and price of a reversal. What I call conventional cycles -- those that are measured from low to low -- cannot be used to anticipate tops since they rarely make their highs in the exact middle of their spans. But this can be accomplished by Point & Figure and Fibonacci projections. When the projection is reached, a reversal occurs. On 1/10, the Closing Comment which was sent to subscribers read as follows:
After today's action, the SPX could now be ready to move to 1293-1294 to complete the entire wave, and the QQQQ to 43.10-20. This is the most likely scenario. If it occurs, then it should be followed by a decent correction, but not a reversal of the entire January trend.
In fact, on the next day the SPX reversed at 1294.90 and the QQQQ at 43.31. Both indices had completed a 5-wave structure from their January low when they reversed, and they are now forming a corrective pattern which should end this coming week in conjunction with a 10-week cycle low.
If my base count to about 1320 for the SPX is correct, the final top is not too far away. The QQQQ may top out around 44.50, but projections for both of these indices will be refined as the bull market moves higher toward its final destination through a series of shorter and shorter thrusts.
The momentum indicators are already showing signs of negative divergence but this could change if the market gets a new lease on life and moves decisively beyond the price projections made above, but this is not anticipated. As for the A/D oscillator, it has kept pace by making a new high along with the indices and corrected along with them from an overbought condition. It should also begin to show a loss of upside momentum as we approach the top.
Now that the 9-month cycle has made its low and the minor 10-week cycle will be doing the same next week, the only short to intermediate cycle to influence the market directly ahead will be the 11-week cycle -- which I have also called the short-term cycle in the past. It is currently about halfway through its span, but it is not expected to exert pressure on prices until about mid/February. Of course, regardless of what shorter cycles lie ahead, the 4-year cycle will become more and more of a factor as the year progresses. I do not have a specific date in mind for a top at this time, but will depend on the reaching of price projection targets, indicator behavior, trend and channel lines analysis, etc... to determine when it has arrived. As you will see on the weekly charts that appear below, we are near the top of a well-defined channel and this, in itself, should provide some resistance to any further upward progress.
We should acknowledge that the decennial pattern has proven itself once again by fulfilling its prophecy for 2005, and it might also be worthwhile to consider what it has in store for the market during the second half of the decade. In general terms, I would say that the pattern will probably persist, but with some important modifications, because of the major cycles that will be making their lows early next decade. I don't want to spend too much time on this subject. I am currently more concerned with forecasting what the market is going to do between now and the end of the year than what will happen several years from now. However, I believe that the coming bull market top will not be surpassed for 10 years or more.
Some analysts have concluded that the top of 2000 marked the beginning of a secular bear market. They are partially right, in the sense that for the Dow Jones Industrials, the SPX and the Nasdaq, this bull market only represents one of the major up phases. The indices which are making historic highs today are probably one phase behind and are just now reaching their high points. But by 2014, all indices will have made new long term lows. This is because very long term cycles -- some of which have spans which exceed an average normal human life -- will be bottoming around that time. Since they are ( relatively speaking) in their final phase, their effects are already beginning to be felt in the form of severe geophysical manifestations, social and economic changes (such as globalization and its multi-faceted ramifications), and increasing geopolitical instability. In other words, our world is just beginning to go through a period of accelerating, major turbulence (chaos) that will last for a decade or more. I doubt that even futurists could foresee precisely what lies ahead, and I am certainly not going to speculate about specific occurrences except to say that it is bound to have significant economic repercussions.
Remember Mark Twain's admonition: "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."
The good news is that, if the decennial pattern maintains itself, the stock market will probably not start to decline sharply until after 2009.
The geopolitical instability to which I refer above has taken a new twist recently with events taking place in Israel and Iran adding to the concerns about the situation in Iraq and terrorism. I am quite certain that this is the main driving force behind the rise in gold. Certainly it is not inflation, which was the primary cause in the late 70's and early 80's and which now appears to be well-contained. Nor is it related to the action of the US Dollar which has pulled back slightly after meeting resistance at 92, but is not exactly crashing. However, I would not be surprised if things "cooled off" in the Middle East in the near future and caused gold to pull back, because the Gold and Silver index (XAU) has reached a level which meets the upper range of the projection derived from its base in 2000/2001. That target zone was between 127 and (recently revised) 143. So if the XAU does not substantially exceed 143 and begins to pull back in concert with the price of gold, it would probably be because some developments have taken place to allay the fears that events in the Middle East are getting out of control -- at least temporarily. Perhaps a more accurate way to say this is that because the projection has been reached, some developments will take place....
The price of Oil is not being affected to the extent that gold has been. Since its high of 70, it has formed a wide congestion range which extends to a low of 56, and it does not appear ready to exceed its boundaries in either direction any time soon.
I am including 4 charts. The first three are weekly charts of the three major indices so that you can see graphically their relative performance. Note that the SPX and the Nasdaq are approaching the top of their price channels where they should meet resistance. Neither the price chart nor the MSO, which appears below, is showing signs of an imminent reversal. Therefore, I assume that the top is still a few weeks away.
The fourth chart is a daily chart of the SPX. Here also, the chart pattern does not suggest that a sudden reversal will be taking place. But the MSO and BSP index are already showing negative divergence and the A/D, although it has kept up with prices during the recent rally, has given up a lot of ground in the past few days, and will undoubtedly not make a new high along with prices in the future. All these are preliminary signs that a top may be forming.
Under the influence of the 9-month cycle, the SPX came very close to fulfilling the price and time expectations for a reversal outlined in the last newsletter. This cycle is also fueling what is probably the last advance of this bull market. A top is expected in a few weeks.