Fibonacci and Other Cycles Converging in November 2006

By: Robert McHugh | Sat, Oct 28, 2006

We are going to examine some cycle work that suggests a trend turn is possible, maybe even likely, in November. Here's a fascinating chart. It starts the week of August 27th, 1999. Why is that date an important enough place for the following Fibonacci turn date cycles to begin? Because it was the final top in the Dow Industrials before we received the last Dow Theory "sell" signal. Since August 25th, 1999, the Dow Industrials have formed their most significant tops within one week of a consecutive series of Fibonacci weeks from that date. What is so fascinating here, is the next top is scheduled for the week of November 17th, 2006 +/1 one week, shortly after the coming U.S. elections. This happens to also be when several other cycle turn dates converge, which we will cover over the next few pages.

First of all, let's go over Fibonacci numbers. They are a unique series of numbers where the sum of two in a row equals the next number in sequence, starting with the number 1, then 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, etc..., where 1+1 = 2, 1+2 = 3, 2+3 = 5, 3+5 = 8, 5+8 = 13, 8+13 = 21, 13+21= 34, etc... What makes these numbers special is that they pretty much define the architecture of nature. The relationship of one addend to its sum is always .382, and the other addend's relationship is the number phi, .618. For example, 13/34 = .382, and 21/34 = .618. Phi, and phi are eternal numbers, that is, the decimals go on forever. In mathematics, these numbers are called irrational numbers. For some amazing reason, Fibonacci numbers show up all over the stock market, defining time and price moves.

Here's the data for the above chart: On January 14th, 2000, we saw the previous all-time nominal top in the Dow Industrials at 11,749.97, the Fibonacci 21st week from August 25th, 1999. The next major top occurred on April 12th, 2000, at 11,423.90, one week before a Fibonacci 34 weeks from August 25th, 1999. The next major top occurred on September 6th, 2000, one week before a Fibonacci 55 weeks from August 25th, 1999, at 11,401.19. Then, the next major top in the Dow Industrials occurred on May 11th, 2001 at 11,350.05, one week after a Fibonacci 89 weeks from August 25th, 1999. Then, the next major top occurred on May 17th, 2002, at 10,353.43, one week before a Fibonacci 144 weeks from August 25th, 1999. Then, the next major top occurred on February 19th, 2004 at 10,753.63, a precise Fibonacci 233 weeks from August 25th, 1999's top. Next up is November 17th, 2006 +/- one week, a Fibonacci 377 weeks from August 25th, 1999, three weeks from now. This suggests we might see an end to the summer/autumn rally shortly after the election.

One point to make here, is that the declines that followed these tops were all severe. Every one.

There is more cycle work to consider here. While we have a Fibonacci phi mate turn date identified for November 3rd, there is another one coming in the next month, with the best fit scheduled during the same November 17th week, on November 13th, +/- a few days. The nature of this phi mate date is that it is likely to be a major turn, given it has two phi mates, and both were significant turn dates themselves. This tells us, the November 3rd turn could likely be relatively minor compared with the November 13th one. The last phi mate turn date of August 11th, 2006 has been followed by a 1,079 point rally in the Dow Industrials.

Here is the data on the November 13th, 2006 Fibonacci turn: November 13th, 2006 is 1,718 trading days from January 14th, 2000's top (the all-time top in real dollars). It has a Fibonacci relationship with April 6th, 2004's top, which was 1,062 trading days from January 14th, 2000. April 6th, 2004 is 656 trading days from November 13th, 2006. 656/1718 = a Fib .382, and 1,062/1,718 = a Fib phi .618. The second phi mate for November 13th, 2006 is August 22nd, 2002's top, which was 654 trading days from January 14th, 2000, and is 1,064 trading days from November 13th, 2006. 654/1718 = an approx. Fib .382, and 1,064/1718 = an approx phi .618.

Another cycle turn date scheduled around that November 17th week is a Bradley model turn date of November 28th. It is a major turn date (not all Bradley model turn dates are considered major). The Bradley model identifies turns based upon alignment of the planets and stars, which sounds bizarre, but has an amazing track record. It may have something to do with how the gravitational forces affect mood, and mood affects market psychology, and therefore bullish or bearish tendencies of the masses.

We're not done here. There is more cycle analysis that points toward a potential stock market turn in November, 2006.

There are several previous tops and bottoms that were a Fibonacci number of trading days from a cluster of time converging in November 2006, actually from November 6th to December 5th. If we widen that timeframe to October 30th through December 5th, we can count 11 former tops or bottoms that were phi mate dates that are a Fibonacci number of trading days from -- essentially -- November 2006. While five weeks is a broad band for a turn target, the huge number of converging cycles here warn of a meaningful turn, so five weeks isn't that wide considering what might be coming. The cluster data is as follows:

• August 11th, 2006's top is a Fibonacci 55 Trading Days from October 30th, 2006.
• November 25th, 2005's top is a Fib 233 Trading Days from October 31st, 2006.
• November 27th, 2002's top is a Fib 987 trading days from October 31st, 2006.
• May 9th, 2005's top is a Fib 377 trading days from November 6th, 2006.
• April 17th, 2006's bottom is a Fib 144 trading days from November 9th, 2006.
• July 18th, 2006's bottom is a Fib 89 trading days from November 21st, 2006.
• June 23rd, 2004's top is a Fib 610 trading days from November 22nd, 2006.
• December 27th, 2002's bottom is a Fib 987 trading days from November 29th, 2006.
• June 2nd, 2005's top is a Fib 377 trading days from November 30th, 2006.
• May 10th, 2006's top is a Fib 144 trading days from December 5th, 2006.
• December 30th, 2005's bottom is a Fib 233 trading days from December 5th, 2006.

There's more. If you want to count calendar days, we have an early November cluster period from November 2nd through election day, November 7th. The February 19th, 2004 major top is a Fibonacci 987 calendar days from November 2nd, 2006. The March 7th 2005 major top is a Fibonacci 610 calendar days from November 7th, and the June 14th, 2006 bottom is a Fibonacci 144 calendar days from November 5th. While these are only 3 dates, the window is tighter, and each top or bottom is quite significant.

There's more. Peter Eliades of Stockmarket Cycles (www.stockmarketcycles.com) pointed this relationship out recently: There were 214 weeks from the 4 year cycle low in September 1998 and the 4 year cycle low in October 2002. He noted that George Lindsay spoke of a bottom to bottom to top pattern that repeats itself, meaning we should see a major market top 214 weeks from October 2002 -- which occurs in early November 2006.

Let's understand what perspective we hold on cycle technical analysis. We do not trade off of cycle analysis. We trade off our key trend-finder indicators, the Purchasing Power Indicators and the Stochastic signals. We do not trade off of Elliott Wave either. EW and cycles and analogs and patterns and divergences and seasonals and other interesting stuff is just that -- interesting stuff. If our rhetoric points out risks over the horizon from these supportive technical tools, that is perfectly appropriate background information so that we can be ready for turns. However, we trade our proprietary PPI and Stochastics, and 10 day average Advance/Decline Line Indicators, but not the other stuff. We've had Purchasing Power Indicators perform brilliantly in the S&P 500, Dow Industrials, NASDAQ 100, Russell 2000, and HUI Amex Gold Bugs Stock Index against the odds of EW, cycles, seasonals, percent above indicators, analogs, divergences, and patterns. The 10 day average Advance/Decline Line Indicators have also performed quite well.

This doesn't mean EW, patterns, divergences, analogs, seasonals, or cycles are not worth studying. Quite the opposite. They prep us, map for us, identify risks, confirm the PPI and Stochastic signals, and give an overall flavor of intermediate-term potential in trends. If rallies occur against the grain of the vast body of technical analysis, it alerts us to possible interventions. We present these market analysis approaches as supportive to the guts of our market analysis newsletter service, which is our key trendfinder indicators, and 10 day average Advance/Decline Line Indicators as summarized on pages one and two of every issue.

How do we combine the risks noted in the supportive technical analyses studied versus what our key trend-finder indicator signals suggest? We increase or decrease the amount invested, tighten or loosen stops, raise or lower price targets, etc... Our key trend-finder indicators measure breadth momentum (14 day and 30 day Stochastics, and A/D Line Indicators), and measure Supply and Demand momentum (Purchasing Power Indicators).

If one is not a risk taker, nor a trader, but want a solid, sleep-well-at-night, investment strategy, we offer the conservative balanced investment portfolio which is shown in the Guest Articles section at www.technicalindicatorindex.com as a model for ideas. Some segments of that portfolio will make use of our key trend-finder indicators as well.

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"Now as (Jesus) approached the gate of the city, behold,
a dead man was being carried out, the only son of his mother,
and she was a widow; and a sizeable crowd from the city was with her.
And when the Lord saw her, He felt compassion for her,
and said to her, "Do not weep."
And He came up and touched the coffin;
and the bearers came to a halt.
And He said, "Young man, I say to you, arise!"
And the dead man sat up, and began to speak.
And Jesus gave him back to his mother.
And fear gripped them all."

Luke 7:12-16

Author: Robert McHugh

Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at www.technicalindicatorindex.com. The statements, opinions and analyses presented in this newsletter are provided as a general information and education service only. Opinions, estimates and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided.