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
Current Position of the Market.
SPX: Long-Term Trend - The 12-year and 10-year cycles are still in their up-phases and could continue to influence the long-term trend, but a correction is probably very near.
SPX: Intermediate Trend - The uptrend from June '06 is coming to an end and could already have ended for some market indices.
Analysis of the short-term trend is done on a daily basis with the help of hourly charts. It is an important adjunct to the analysis of daily and weekly charts which determines the course of longer market trends.
Things were turned around, this past week. One of the two major indexes to make a new bull market high was the NASDAQ. What does this mean? The SPX/NDX relationship is closely watched by analysts who consider under-performance by the NDX to be a negative for the market. Until 2 weeks ago, the NDX was under-performing, but on the first trading day of the year, the index made a short-term climactic low and has moved up ever since. This has erased the negative divergence which was building up and has in fact given the NDX a slight positive edge.
The Wilshire 5000 also made a slightly new high. The SPX and OEX missed doing so by a fraction and the Dow Industrials fell short by about 30 points. One of the biggest laggard was the NYSE Composite. This lack of uniformity among the various indices probably reflects deceleration. In fact, if you look at the pattern of the past several weeks, there is a general flattening and sideways trading in a broad range, but there is no real weakness showing yet.
I am still of the opinion that the stock market is in the process of making an intermediate top and is preparing for a correction which should last 2 to 3 months. The term "correction" may even be too strong and consolidation in a long-term uptrend may be a better choice of words. With the NDX making a new bullmarket high last week on the heels of GE which did the same in late December, I believe that it should only be a fairly mild correction, after which the long-term uptrend is likely to resume.
Let's analyze the various market components individually
Since the bottoming of the 4-year cycle during June/July '06, the market has been in a powerful uptrend, but with the 6-week cycle 20 trading days along in its normal 26-30 day phase, a short-term top is very near. Best guesstimate: a high point could be reached by next Tuesday, followed by a decline into January 22-23. After a rally into the end of the month, the 20-week cycle should take over and cause a decline into early to mid-February. By then, the influence of the 9-month cycle should increase and extend the correction to about the end of March.
There are a number of potential Point & Figure projections for the rally in the SPX which started last week. The mid-course correction of the 6-week cycle formed a complex structure. A short-term base caused by the first low at 1404 was followed by subsequent testing of the low for two more days. This extended the entire base to a potential count of 1440, while the short base has a maximum count to 1433.
Of the two, 1433 could turn out to be more significant -- at least for the short term -- for several reasons: The target of 1426-1433 was given a few weeks ago for the end of the move which started at 1225. It has already proven itself by causing a retracement after the SPX touched 1431 in the middle of December. But if the higher end of that projection range is still valid, then 1433 could be as far as we go for now.
Another reason is that the last phase of the move of the current rally looks sluggish. This sort of action precedes a top and could signal that the down-phase of the 6-week cycle is about to begin. It is still possible that we could make it all the way to 1440 before this happens, but for this to take place, a resumption of the upside momentum will have to develop on Tuesday.
The same sluggishness was also evident in the NDX on Friday and this was in contrast with its price action earlier in the week.
After trading mostly in the red for several days, the A/D finally had a very good day on Thursday, but by Friday it already seemed to lack the will to follow-through. The McClellan Summation Index has been declining steadily in both the NYSE and Nasdaq, which is another indication of deceleration and of an approaching top. But the new highs/new lows index has remained strong and is suggesting that the market is not vulnerable to a large correction at this time.
The move from June/July is obviously a separate phase within the larger bull market structure from October 2002. For this reason, it is best to analyze it separately until it has been completed. Will a new high in the SPX mark its completion? If it does, it would be appropriate for a correction to take place afterwards which is larger than any of the previous ones since the 1220/1225 low. This is what the current collective picture seems to forecast. When this has occurred, it would then be the task of the EW analysts to consider how that phase fits within the framework of the entire bull market move and decide whether it puts an end to it, or if it is simply another cog in the entire bull market machine.
There is a loss of upside momentum in the general market which foreshadows an intermediate term correction. This is consistent with the current cyclic configuration. However, the newly found strength of the NDX is one of several signs that the correction will be mild.
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