Stock Indexes at Key Make-Or-Break Level
The stock indexes (most particularly the SPX) are at or near key levels, which - if moved above - would confirm a 10 and 20-26 week cycle combined low in place. Alternately, holding below these same levels in the days ahead could allow for another correction back to or even below the recent swing low.
Back as the indexes were peaking these two cycles, there were obvious technical warning signals. At the time, both the NYSE A/D line and the McClellan Summation indexes were diverging from price action. Back on an interview that I did on the 'Marketviews' show in mid-July, both the following charts were presented, noting these particular divergences:
Normally, a diverging Summation index is not a problem for the mid-term - provided that the A/D line has confirmed the action by making higher highs along with price. We saw this back at the selloff into the March and June low of this year. In other words, each of these selloffs had the NYSE A/D line confirming the action with price - which foretold higher levels likely to follow after any near-term corrections were complete. This came into fruition, as both the March and June price corrections were ultimately followed by higher highs again on their following swings up.
However, in July the market peak there saw both the A/D line and the Summation indexes diverging, which is a bearish pattern and was last witnessed in early-May of 2006 - right before the huge selloff that followed.
In addition to both of the above, the cyclic 'Trendicator' (which is my gauge of mid-term market momentum) had turned down and had just issued a sell signal on 7/12/07 at 1547.70 SPX CASH:
The 'Trendicator' gauges the momentum from each of the larger daily cycles that I track, which includes the 45-day (nominal 10-week) cycle, the 120-day (nominal 20-26 week) cycle, the 360-day (nominal 18-month) cycle and the larger four-year cycle component. When it turns up or down, the probabilities favor that the mid-term trend has either changed or is in the process of changing, as shown by the recent signals on the chart above from the past 12 months.
With all of the above, the expectation was for a drop back to or below the lower daily Bollinger Band; at the time that band was at the 1480-ish level for the SPX CASH index. That was seen, and since then we have also registered some positive divergences between shorter-term breadth measures, with indicators such as the McClellan oscillator:
The shorter-term divergences between the McClellan oscillator and price can and often will be seen at larger cyclic bottoms. The last one was in fact registered at the 3/14/07 swing low - which so far has proven to be the lowest intraday low for the year.
With that, the basic cyclic configuration has two of the larger daily cycles - the 45 day and the 120-day components, in bottoming range, with the larger 360-day component still pointed up at this time - but with the latter being valid only as long as the March low (1364 SPX CASH) holds the near-term downside. The next chart shows the approximate positions of these larger cycles:
As you can see, the 360-day cycle is still pointing upward - while the smaller 45-day and 120-day components are in bottoming range at the most recent swing low. With that, if the 360-day cycle is going to continue to see the SPX making higher highs again in the months ahead, then price has to hold above the March low - and then must confirm a bottom with both the 45-day and 120-day components.
For that confirmation, there is a trendline that goes over top of the recent action, which currently comes in at or near the 1467 level for the SPX. A daily close above this figure - if seen - would be the best confirmation that the combined 45/120-day low is in place, and that a move to new highs (above 1555.90 SPX CASH) will be seen later this year. Closing above this line would also call in the likelihood of a quick test of the 45-day moving average, which is a normal price magnet to the upward phase of this cycle. The market would probably stall at or near the same, for another correction south into later in September - and then that correction would be expected to give way to new all-time highs later in the year. The overall path could then look something similar to shown in green on our next chart:
Note first that I have switched to the DJIA weekly chart for this, as I have much longer-term data for this index - which is what is needed to make the green projection path. The basic suggestion is that if a larger 45/120-day low can be confirmed (by closing above trendline resistance), then the stock indexes could witness a new 5-wave pattern to the upside into January of 2008. If seen, there is a 360-day upside target to 1574-1621 SPX CASH, which would be the likely magnet to price.
Holding below this pivotal trendline? If that is seen, then the indexes could very easily be back down to or below the lows again on the next swing down on the daily chart. That is possible, due to the large average variance of the 120-day component, which can vary from 90-150 days in length. Obviously then, we are at key levels right now - and the market action around the same in the days ahead should offer up some telling information; stay tuned.
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