Countertrend Rally Now Underway
We are – in all likelihood – looking at the highs for the broad-market indices in the rear view mirror. The sharp break we saw in August and late September would appear to validate that premise. However, no bear market goes straight down without a few respites along the way. Indeed, bear market rallies – one of which we are now experiencing – are typically characterized by low volume and high volatility – and that is exactly what we are now witnessing.
Following the initial break from the May 19, 2015 high, the Dow Jones Industrials found recent support at the 15,625 level, and in the process, took out the October 15th low of last year. Of the Big Five (DJIA, S&P 500, NASDAQ Composite, New York Composite, Dow Transports), only the S&P 500 and NAZ failed to break below their respective October 2014 lows. Later this year, though, I fully expect the S&P and NAZ will exceed those October 2014 lows as well. In the near term, the pattern structure suggests that the broad market is undergoing a countertrend move higher in what I view as a bear market that has about another seven months to completion.
The 17,500 level for the DJIA had served as an underlying floor of support for that index – and the overall market – before giving the heave-ho in early August. It would not be surprising to see the DJIA push back to that level in the coming weeks. That former support level should now serve as resistance. Given the prospect for lower equity prices into May 2016, investors would be wise to consider this move higher as an opportunity to liquidate any remaining longs and to add to short positions for the next slice-and-dice to the downside.
It All Ended With the NASDAQ Composite
The 2015 topping evolution was bookended by the Dow Transports high on the left and the NASDAQ Composite high on the right. This is an eight month swath of time – 159 trading days to be more-precise – and 159.2 trading days is the product of four times the nominal 39.8 trading day cycle.
On the monthly chart, we can see that 5,000 – a major price octave – has served as major, long-term resistance. For the NASDAQ, 5,000 will probably mark a double top for quite some time. In the counter-trend move to the upside now underway, we could well see the 5,000 mile marker tagged once again. But even if reached, I do not see any significant break-through to the upside for the NAZ. The next major price octave below the 5,000 threshold and a likely target by May 2016 – if not sooner –is 3,750.
Cyclical Clusterings Point to Next Trading Cycle High in 23-Oct-2015 Time Period – or – 05-Nov-2015 Time Period
Another Two-to-Four Weeks of Buoyancy – Then Lower
On the chart above, I have labeled the three prior trading cycle highs: 20-May-2015, 20-Jul-2015, and 17-Sep-2015. The first two were separated by 41 and 42 TDs – slightly over my 39.8 TD nominal time count. Through an iterative process, I have found what appears to be an interesting 0.382 / 0.618 Fibonacci ratio clustering in the October 23, 2015 time period. A trading cycle high on that date two weeks from now would represent a contraction to 26 TDs – which could fit well with the average of the pattern over the last year.
On the other hand, I note the time period surrounding November 05, 2015 contains an interesting clustering as well that could serve as the next high-point reversal. The November 5th time period occurs 118 trading days from the May 20th high in the S&P 500. Three times 39.8 equates to 119.4 trading days, which would align well with the July 20th and September 17th subsequent trading cycle highs. November 5th is also the next debt ceiling date.
Both crude oil and unleaded gasoline prices have cascaded southbound since June 2014. Prices found recent support just below $40 spot in late August. I view this August 2015 low as part-and-parcel of a 39.8 month cycle series. The prior 39.8 month cycle low occurred in June 2012; the low prior to that low occurred in February 2009. Through extensive regression analysis, I have identified the November 2018 time period as the likely point at which to expect a major bottom in oil prices – also approximately 39.8 months from the August 2015 low. Note, too, the structure in my 144 month %R indicator below. Despite the near-term bounce, crude oil prices are likely to remain depressed well into late 2018.
Comex gold has found recent support at the 1,125 level – a major price octave. Although 1,000 remains my outstanding target, this countertrend move now underway could carry gold prices back up into the band of congestion in the 1,190 area.
The more-volatile XAU – now back above 50 – could see further appreciation back to its still downtrending 200 day moving average before again reversing.
Long story short, it would appear we are in for a choppy, volatile two-to-four weeks, with a modest upside bias into late October / early November. I expect the next down move will break the 1,875 shelf of support basis (the S&P 500).
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