In the past few weeks, my columns have covered a great deal of Chaos Theory and the underlying structure of the markets. According to Bill Williams' book, “Trading Chaos,” the underlying structure of the markets is usually unseen. What I've done over the past couple of years with my cycle work is making as much of the 'unseen' visible. While we haven't had the one knockout cycle blow that occurred in May 2006, we have had a series of smaller 'body blows' that slowly appear to be taking their toll. The implication is that even if the markets do survive all of these cycle points, they will be weakened severely; and if we are to continue the uptrend, it will end up being a shadow of itself. The implication in straight technical terms is topping is a process and markets rollover slowly.
Last Wednesday we began yet another of these time windows, which extends to this Wednesday. The Nasdaq hit a new high on what was the 232nd day off last July's low. It was not confirmed by other indices. The next day the Nasdaq E-mini hit a much anticipated turn on the hourly chart (anticipated in my circles) right in the window. The NQ put in a big-time reversal on the 618th hour off the March 14th pivot low for the futures day session. This looked like a good reversal as the Dow was down 80+; and in the blink of an eye, it was down only 3. We never know what these cycle points lead to and we have to take them in the context of overall market conditions.
Friday the NQ gapped down, which is always a sign the bias will be down for the day. Thursday night's instructions were to be bullish against the morning reversal pivot. On Friday, the Dow and S&P 500 blew through it. The Nasdaq took it out slightly and so far, this action has not been confirmed by the NDX or NQ. Since we are working with the time bar in the NQ, it’s most important that chart not take out Thursday's low. The fact that the NQ/NDX have not taken out Thursday's low indicates we have a bullish non confirmation of the lower prices in the Dow and S&P 500. The fact the Nasdaq violated is a red flag. Overall, it supports the theme that even if this uptrend remains, it has been weakened. Looking at the Nasdaq, its high at 2634 falls only 11 points shy of the very long-term 38% retracement level of its dearly departed old bear market. The exact number is 2645.
In the pattern recognition scheme of things, it would have been so much simpler had Thursday's reversal pivot come in at 2645 and started dropping. That would have been recognized as an obvious top, right on the time window on the summer solstice. It didn't turn out that way. Now we have a Dow and S&P 500 that appear to want to go lower, with an NDX that appears to want to continue going sideways. These charts are as complex as they've been at any time in 2007.
With this degree of complexity, where do we turn for answers? Perhaps it is finally time to pay more attention to our old bellwether the SOX. Back in May, the SOX finally burst through the 61% retracement of its 2006 correction. It pulled back but didn't collapse. As you can see, it has retested and taken out resistance. It has done so on the 230th day of its own cycle. FYI, it bottomed a couple of days after the Nasdaq complex last summer. Friday it put in a harami candle after Thursday's strong move. A harami is only a medium-grade probability pattern. What I'm thinking is if the SOX doesn't fall apart here, it could still conceivably create a low by the back end of its time window by Wednesday (its day 233) while the rest of the market hits its day 237. The Dow and S&P 500 may continue to fall off here but if the SOX hangs in there we could have a scenario of correcting the first half of the week and rebounding no later than Thursday.
Keep in mind I would have an entirely different, more bearish outlook if it were the Dow that was still hanging in, with the NDX leading to the downside. But with the information we have now, its the other way around. For this scenario to unfold we need to see an orderly pullback in the SOX. Keeping with my pattern recognition scheme of things, if Monday is a repeat of Friday we need to see the SOX taking the smallest hit. We do not want to see the SOX violate 497 in the next couple of days. If it does violate then something more sinister is brewing.
The other bellwether you should watch is the BBH. It has been hit hard this year and particularly so since May. It comes into the week at 176 and the March/2007 low is 172.67. We are testing that level as major support right now. Coming into the week its 107 days off its January high. Monday is its Gann 108 day cycle point which means if it’s going to bottom in needs to do so no later than Tuesday.
Those of you sitting with Dow or S&P 500 based positions need to pay careful attention first to the June lows and finally to the 38% retracement levels off the March lows. These are Dow 13000 and S&P 500 low 1470s. Since the NDX is not confirming here and we still can't rule out bullish possibilities, those of you who are longer term bullish holders should not get emotional here but should not hold positions below these levels that would call for minimum corrections. If these areas are taken out, we've likely confirmed an intermediate term top.
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You can still reach me at fibonacciman@aol.com.
