It remains my premise that the May/June 2015 time period contains a panoply of cycles – long-term, intermediate, and short-term – all suggestive of the potential for an important stock market high in the making. Indeed, the technical evidence that we are now looking at a completed major stock market top in the rear view mirror is overwhelming. But if anyone had doubts about a pending bear market, I would think this week’s action should have erased that skepticism.
The popular averages have undergone a swift slice-and-dice move to the downside – with a test of the August / September lows in sight. My expectation is that this test will come rather quickly – probably sooner rather than later – and I suspect it more-likely-than-not that the August/September lows will give-way to the downside cyclical pressures from the north. We are in a bear market, folks, make no mistake. We will have countertrend rallies, of course, but the primary trend for equities is now decisively southbound.
The 18,125 region proved to be terminal resistance for the Dow Jones Industrials. The market-leading index remained sandwiched between this level and the 17,500 floor of support for 12 months. But once investors opened their new year champagne, the selling intensified – with a break of 17,500 and 16,875 occurring in rapid succession. In like-fashion, the S&P 500 sliced quickly through the 2,000 floor of support. The pair of twin bottoms at the 1,875 level established in late August and September are the next targets for the ensuing decline. The next major price octave below 1,875 is at 1,750 – an area which could provide the next floor of support by early May 2016.
The near-vertical rise for the NASDAQ Composite is reminiscent of the move up into the 2,000 peak. The 5,000 level has proven to signify major long-term resistance. We now have a double top formation on the charts that is likely to stand for quite some time. I had toyed with the idea that the NAZ might have one more last gasp into marginal new high ground. But by early January my indicators turned decisively lower and, in the process, confirmed the bear market impulse to the downside. No more new highs for any major index. There will be countertrend rallies along the way, but by May 10th of this year we should be looking up at these prices. Buckle up, folks, we’re heading south.
One of the tools I employ involves the calculation of the rate of change in price – the slope at which a stock or commodity moves up or down. Some analysts refer to this calculation as "market momentum." However, there is really no “momentum” here at all, for those with a background in physics or engineering will recognize that any measurement of price over time is correctly called price velocity. In my graphic above, my price calculations for 7, 14, and 20 trading days are plotted. The velocity of price is clearly to the downside. Before we see any low point of import, I would expect to see some kind of divergent structure in this indicator. That is, we would need to see a bottoming structure with price for the S&P 500 at a lower level and a corresponding higher level in the velocity plots. No such divergence is yet evident.
168.6 TD High-High Cycles
In the near-term, I am focused on the potential for some kind of snap-back low in the coming days. Not a major low – but a snap-back from a break of the August/September lows. Above is a chart of the S&P 500 with a cycle that has averaged 168.6 trading days (TDs) (fib 377 / √5 = 168.6). Since the October 04, 2011 low point, each successive recurrence of this cycle has denoted every primary cycle high.
But rather than coincide with the next primary cycle high, I rather suspect the next occurrence of this cycle will denote what could be a “tradable” low. The regression analysis points to the January 26, 2016 time period for its next recurrence. However, I note that adding (168.6 X 10.236 = 1,725.8 TDs) to the 06-Mar-2009 Low = 14-Jan-2016. As such, I expect this cycle to make its mark closer to the latter part of next week. It is also conceivable this cycle could skip this beat. But any rebound as a result of this cycle’s next occurrence should be used as a gift for investors to relinquish any remaining longs and/or add to existing short positions.
The other calculation I perform involves determining trend through measurement of price range. Any range-based measurement – stochastic, percentage range, or relative strength indicator (RSI) – will do. The important point is to employ the calculations over multiple time periods (no less than three). In the graphic above, I have computed percentage range measurements (%R) over multiple time periods – 27, 54, 81, and 144 trading days – and combined their calculation. The dots are clearly pointed lower – reflecting the downward trend in price. Any significant market low would need to see this indicator at an “oversold” indication. That’s a relative term, of course. But we would need to see the smoothing functions (depicted in blue and magenta) at much lower levels to reflect a true price bottom – and we are nowhere near that level.
CASE SHILLER HOME PRICE INDEX
The Case-Shiller home price index tracks the value of residential real estate in 20 metropolitan regions across the United States. There are multiple Case-Shiller home price indices: A national home price index, a 20-city composite index, a 10-city composite index, and twenty individual metro area indices. The index is published on the last Tuesday of each month, with a two-month lag. Data for the Los Angeles area region is depicted below.
Home Prices Higher into September 2016
My analysis reflects a primary cyclical pattern of 193.2 months – right about 16 years. The underlying trend points to a rising housing market for the greater Los Angeles metropolitan area – as well as the National Index overall – into the September 2016 time period.
A 39.8 year cyclical rhythm dominates the interest rate market. The chart at left clearly reflects the downward trend in interest rates with the next major low due in 2021.
Although metals prices are still in the early stages of a multi-year bear market, Comex gold is inching higher in countertrend fashion. The vertical lines on my chart depict primary cycle lows occurring at roughly five month intervals. I look for price to continue the push higher towards 1,125 – the next major price octave (depicted in light blue) – and a probable area of resistance. But I’d be surprised if we get much more than that. $1,000 gold is still in my sights for further down the road.
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 abridged Harley Market Letter for January. Want to learn more from acclaimed market analyst Stan Harley? Visit his site and subscribe to the full Harley Market Letter.
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