A Bear on the Horizon

Stan Harley |

SELL STOCKS NOW

39.8_79.6_Trading_Day_12_1.jpgI continue with my theme that the stock market is on the march toward a rendezvous with a major top in the present time frame. There are many factors that go into this decision. Numerous time cycles – not the least of which is a 79.6 month high-to-high cyclical function I have identified – as well as additional time cycles like the 185.5 week cycle. A whole host of technical factors contribute to my expectation for a major market top as well: Divergences among the major domestic and foreign indices, the move higher into major resistance levels, and a continued contraction in 52 week New Highs.  Given that technical backdrop, investors would be well-advised to be prepared for the potential of a stock market top of significant import – and the coming Ursa Major – the Big Bear.  

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Above I show my indicator plot that measures price velocity across three daily time frames: 7 trading days, 14 trading days, and 40 trading days. Note the divergent structure developing in the 7 day and 14 day components. And, with today’s new high, the 7 day component has just nudged the underside of the 14 day component and turned down. That pattern suggests to me that the trend is about to turn south.  And, if we’ve just witnessed a major top, a serious whack is indeed forthcoming.

28-November-2014 High?

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A challenging call here to be sure – but I would suggest it is indeed very possible we may have just seen my expected high. Today, we saw the Dow Jones Industrials, the Dow Jones Transports, and the S&P 500 push into intraday record high territory. The NASDAQ pushed into fresh new 14 year high ground – but not all time high territory.  Notable laggards:  the New York Composite, the Russell 2000 – both of which were down sharply today – the latter by a hefty 1.46%. The S&P 500 has pushed to just above the 2,062.50 price octave – my long-term outstanding target for this index. We are there. And running out of juice.

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79.6 Month Cycles

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The dominant high-to-high market rhythm on the monthly chart is characterized by a cycle that averages 79.6 months. Note how every major high on the chart above can be defined by this 79.6 month cycle. Other than the 1.236 expansion function that occurred between January 1973 and April 1981, this cycle has been quite regular in its beat. The theory I have developed – that market cycles can be defined mathematically by dividing the Fibonacci series by the square root of five – is aptly validated on the long term S&P chart. The next crest in this 79.6 month high-to-high rhythm is due NOW and should also coincide with a significant bull market top.

Market Internals

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We have what I would characterize as an interesting divergence developing. As a general rule, nearly every major top of the last 100 years has been preceded by a peak in the NYSE Advance / Decline Line. The index upon which this data is based is the New York Composite Index (NYA) depicted at left. The NYA’s high close occurred on July 3rd;  the peak (at this writing) in the A/D Line occurred on November 26th. On that same date, the NYA failed to push above its level of July 3rd. As odd as it may seem, this sort of divergence is still a bearish signal. To a market technician, any divergence over a protracted time period is a warning signal of an important trend reversal. This type of phenomenon is more often seen at market bottoms; at market tops this sort of divergence is rare, but I believe we are seeing it at this time.

Precious Metals

Precious_Metals_12_1.jpgI have said it before: I wouldn’t give a plug nickel for anything metallic right now. Never-the-less, metals prices may have hit an intermediate term low. I note a low-low cyclical function averaging 98.4 months. November 2014 marked 163 months from the prior low in this sequence – a 1.618 expansion in this cycle and a point from which I expect a modicum amount of reprieve in the selling pressure. Although I cannot rule out a pop back up to the 1,250–1,375 range, I don’t see the potential for any runaway push to the upside. Rather than a sustained upside surge from this latest cycle low, I expect more of a “reprieve” in the selling pressure – perhaps more sideways than higher. After which, I look for the bear market to resume.  

Each month, Stan Harley publishes The Harley Market Letter, a newsletter that provides advanced technical analysis of stocks, bonds, and precious metals. This is the Harley Market Letter for December. Want to learn more from acclaimed market analyst Stan Harley? Visit his site and subscribe to the full Harley Market Letter. 

 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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