I would like to express my appreciation for the fighting men and women overseas who allow the rest of us here to do what we do. The Fibonacci Forecaster would not exist without their bravery. Here is a quick recap of last week's high that will serve as not only a validation of my recent articles in the September and May issues, but also a lesson on pattern recognition.
On Wednesday morning, the intraday NQ hit the high tick after 161-15-minute bars off the May 16 pivot low and 133 5-minute bars off Monday's late pivot low. It certainly did not hurt that it was also the start of the 56th day off the March 5 pivot low and 145 weeks off the August 2004 pivot low. For good measure, we were also 378 calendar days off the May 2006 top. These are the cycles that drive the markets. However, we always must take these cycles in the context of the overall environment as nothing operates in a vacuum. What concerns me about this high is the fact the p/c ratio was so high as the trend changed. Coming into Wednesday's action, the p/c was at 1.21, a reading that is more consistent with market lows than highs. This reading is consistent with the kind of fear we usually see after a multi-day pullback. I would feel more confident in thinking last week was a top if the reading were closer to euphoria than fear. Readings of .80 are neutral and had we been at a reading of .75, at least the market could fall for several days before fear would creep into picture. Can we still have an intermediate correction starting from where we did?
Leaving the cycles alone for the moment, if the markets are to drop, the mindset of 'buy the dip' is going to have to take root. During the wave that developed last May, the p/c dropped along with prices, which implied that options players were considering every drop a buying opportunity until fear finally came into the market in July. Keep in mind, during most buying waves over these past few years, the p/c continued to rise along with the price action.
All of that being said, we now have a situation where we have to determine what kind of pattern we are dealing with. Last May, we had six cycles, the smallest of which were on the daily time frame that turned the market. This year, we have had many cycle points and the markets finally elected the last group in the month to change direction. From the information above, I have demonstrated that we turned on one weekly, two daily and two intraday cycles. This is strong, but not as strong as last year and not even as strong as the clusters that existed only two weeks ago.
For those of you who are swing, intermediate to longer-term holders, the minimum requirement for a correction with this degree of cycle would be a 38% price correction off the March 14 pivot low. Keep these numbers in mind: Dow 13000, NASDAQ 2500, NDX 1840 and S&P 500 1468. The less aggressive of you should not give up more profits than those levels and falling below those levels will be a high probability confirmation of an intermediate level turn in the market.
There are mitigating factors here beside the p/c. As I look at the SOX, the pattern suggests we could be at or near a low. If it is not a low, at least it is setting up a technical bounce that could retest its recent high. Even the BBH is showing a healthy positive divergence on the hourly MACD. Finally, the situation on the NQ should give bears a reason to be concerned. If you read the top of this report closely, you will see that I referred to the NDX low being March 5. Didn't the market bottom on March 14? Yes, that would be true but the NDX and NQ bottomed on March 5 and did not confirm the bottom on March 14. The NDX March 5 low was 1710.97 and the March 14 pivot was 1711.28. Folks, that 33¢ is very significant. Why? It seems these markets have a memory and the fact that we can count 55 or 56 days back to the 5th became significant last Wednesday since we were only 50 days off the March 14 pivot. See how paying attention to the small details can work for you?
That being said, the NQ day session consumed 440 trading hours from March 14 to Wednesday morning's high. If we add the low-to-low cycle from March 5-14 we add another 67 hours to this trend. Why is that significant? It may be important because Thursday's late day low was not only 55-15 minute bars off the top (and this was mentioned in Thursday night's update), but it was also 521 Lucas trading hours off the March 5 low. For the love of the 33¢ that separates the two March pivot lows, there is at least a statistical chance the market has already completed this correction.
Now I would not bet my money anymore than I would my reputation on this one cycle point, so what do we do with this tidbit of information? For a light volume holiday session, Friday's bounce was stronger than I anticipated as we already got back 38% of what we lost. But now that we know that Thursday's low came in on at least two intraday cycles, it will take a strong trend to take it out. Watch the behavior on the retest of Thursday's low. A new trend that wants to confirm the top is going to slice through this area of support rather easily. If it blows through Thursday's low, chances are good it will also take out the 38% price retracement discussed above. If it has trouble going through Thursday's low, there is a reasonable chance the 38% markers could be an important low. Does that make sense? To simplify this consider Thursday's low to the 38% retracement an important near term support zone that if taken out confirms a top and most of you will need to take action to protect profits or get short.
The bottom line is I am not totally sold this is a longer-term pivot for the reasons discussed here and in the evening updates last week. On the other hand, I stay in the moment and adjust to what the market is telling me. I need to see more information. I think this bounce should at least retest 61% levels off the high. The bigger situation is we have strong cycles surrounding this top but sentiment is not supporting these cycles. This week can get quite choppy as we can end up testing both ends of this small range since Wednesday's high.
Questions or feedback, email Fibonacciman@aol.com.
