Nov. 27, 2006 — The check is in the mail. Since the bulls have been charge these past weeks, they get to decide when those checks are delivered and profits cashed in. The time cycles are starting to ripen and this rally is becoming long in the tooth. On Wednesday we reached the 88th day of the cycle off the summer low and the S&P 500 responded by pulling back in the 88th hour of the current leg off the Nov. 3 pivot low. It looked as though we would get our pullback on Fibonacci Friday day 89 of the cycle as the NASDAQ E-mini had a 14-point gap down. However, by the end of the holiday-shortened session, the chart made a new price high. This particular turn window extends until Tuesday, so there is still a chance for a correction. The turn window extends beyond the usual plus-or-minus one day due to adjustments markets make when there are half-trading days. However, if we continue to see the NDX leading to the upside it's not going to happen just yet.
Since we just had a slow week this is an excellent time to look at the larger degree cycles. My methodology tracks the time cycles in all degrees of trend, which has enabled me to catch major turns in the market for years. It's not the tooth fairy because markets turn when conditions are ripe. When we have strong moves, like the one from the summer low, what can happen is markets elect to only consolidate for several days in reaction to the time cycle instead of outright reversal. We saw this phenomenon around Labor Day when cycles only produced a pullback that spanned several days. Conversely, in May we saw what could happen when markets do elect to reverse on time cycle clusters.
The NASDAQ is now up 18 Lucas weeks off the July low as well as 89 Fibonacci days. However, in the bigger picture we are up 58 weeks off the October 2005 low, 84 weeks off the April 2005 pivot low and 119 weeks off the August 2004 pivot low. What does this mean? In the bigger picture, I'd prefer to see at least two of the these cycles line up. In May, they all lined up. Here we have a chance for symmetry in another two weeks. At that time, we will be 121 weeks off the August 2004 low and 60 weeks off the October 2005 low. That will put us squarely in a 121-week (Fibonacci derivative) and 60-62 (Fibonacci ratio) week window. Of course, since we are now up 18 weeks, markets can elect to extend even further because in two weeks, this rally leg will be in the 21-week window (+/-1). So we will actually be lining up in three degrees of trend.
One of two things is bound to happen. Markets may continue to extend because they only have a small consolidation in reaction to the 89 day cycle as we had in September. They can elect to extend into the dominant larger weekly influence. We could pullback for 2-3 days in reaction to this window. As we know this is a very bullish seasonal period. Another two or possibly three weeks takes us to the cusp of Christmas and we get the Santa Claus rally. At that time traders go on vacation, the market stalls and we drop once the year turns.
The other alternative is the markets have a larger reaction to this 89 day window and pullback for 2-3 weeks. What that implies is we could correct into this triple time cluster at which time we turn back up on the 21, 61 and 121 week cycles. If that were to happen these markets would go much higher next year. If you want a clue to the higher probability scenario pay close attention to what happens next.
For now, the NDX powered to a new high that was not confirmed by the S&P 500. As long as the NDX is leading, I give it and the market the benefit of the doubt. Last week the put/call ratio elevated to 1.06, which implies there is still room to the upside. As long as options bears continue to get it wrong, this leg will continue. The only change I see for this week is I do expect some market reaction to the downside due to the 89-day cycle coming due. Markets tend to extend further than people expect. For us actually to get a two to three week correction at this point, we need to see the NDX/NASDAQ not confirm new highs in the S&P 500/Dow. Until I see that, I would expect any correction off the 89-day cycle to be small. A small consolidation here implies a rally into the holiday. Questions or feedback? Email Fibonacciman@aol.com
