Despite the potential for some near-term weakness in the equity markets, I am coming to a revisionist theory that my earlier expectations for a pending market top may have been premature. My technical work on an expanded time frame – looking at data from the last 200 years – would suggest the potential that this mother-of-all-bull markets may have a few more months to run. My recent research has uncovered a cycle averaging 318.4 months (26.5 years) that has defined all of the significant highs going back to the 1929 major peak. Should the pattern continue, this cyclical function would suggest the potential for a continued move higher in 2015.
On the Dow Jones Industrial Average chart above, I highlight an interesting trough-to-trough sequence. Note the recurring pattern of 49.2 and 79.6 trading days (TDs) across the lows. Long term readers will recognize that this is related to my 39.8 / 79.6 TD cycle series by a factor of 1.236. The latest occurrence would appear to have coincided with the December 29, 2014 high. Stock prices may have gotten just a tad ahead of themselves in the recent Santa Claus rally. In addition, divergences among the various benchmark indices, too, would suggest the potential for a period of modest consolidation near-term. But with the 318.4 month cycle suggestive of still higher prices in 2015, the bull market forces should keep prices immune from any serious drubbing.
DJIA – From 1900
The chart above depicts the Dow Jones Industrials from 1900. In closely examing the structure, I recently uncovered a cyclical function averaging 318.4 months – roughly 26.5 years. The cycle would appear to have the November 03, 1903 major low as its Genesis Point. I have found that cycles that spin-out high points tend to have a significant low as their Genesis Point. I note the time period between the 1903 low and the January 2000 high spanned a total of 1,152 months – nearly matching the 1,154 months my theory would suggest.
79.6 Month Cycles
The dominant high-to-high rhythm on the monthly chart since the January 1973 high can be 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. If the 79.6 month pattern were to expand to 89 months from the October 2007 high – which I now view as minimally likely – that would carry stock prices higher at least into the first/second quarter of 2015. That expansion would afford the NASDAQ Composite to penetrate the 5,000 level once again – something I had previously doubted would happen – but now give a very real possibility to happening.
Gann’s Rule of Four
Even though the NYSE Advance/Decline Line scored an all time high on December 29, 2014 – coincident with the new highs in the Dow/S&P – the index on which this data is based, the New York Composite (NYA), did not. How meaningful that divergence will pan out to be is unclear for now. However, we have an interesting pattern developing in the NYA that merits close scrutiny. On the NYA chart at left I have labeled the touch points on the downsloping 1 X 4 angle as “1-2-3-4.” It’s been a while since I’ve spoken of this formation, but what appears to be developing was a pattern first observed (to my knowledge) by W.D. Gann. He called this pattern his “Rule of Four.” Simply stated, the rule applies when we have four consecutive touch points on a trend line or Gann Angle. The fourth touch point is make-or-break. If the market breaks through (in this case, to the upside), we usually see a very sharp rally on the breakout. On the other hand, if the market fails to break through, we should see a sharp reversal to the downside.
The world’s major markets – the European markets in particular – tend to follow the patterns in our markets very closely. I continue to note that the European indices have lagged their American counterparts as the U.S. DJIA and S&P 500 have pushed into record high territory. And although the Australian All Ordinaries Index slightly broke below its October low, this index has since recovered. While I view divergences of this character as significant, I am reluctant to place considerable significance on the patterns just yet. Following a period of consolidation in January, I rather suspect the European and Australian indices will play catch-up with their American couterparts in early 2015.
The long term chart of gold says it well: Gold prices are in a major bear market. Indeed, I wouldn’t give a plug nickel for anything metallic right now. Nevertheless, metals prices may have hit short-term support just under the 1,250 level. November 2014 marked 163 months from the prior low – a 1.618 expansion in the 98.4 month cycle and a point from which I expect a modicum amount of reprieve in the selling pressure. I don’t see much of a trade here for investors, though. Metals prices are likely to languish violently sideways – frustrating both bulls and bear alike. After a period of consolidation in the 1,250 region, I look for the bear market to resume. The next major floor of support is likely around 1,125 – with the more-important 1,000 level beckoning from below.
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