There is no doubt that this is a critical week for the stock market. As July turns into August we start to enter a period where intermediate to long term cycle points begin to exert their influence. We are not even talking about the March pivot low any longer. When I talk about intermediate term cycle points, the implication is from the low made last summer and before that. August is a month where the relative degree of trend relates to the June and July 2006 low of the various indexes. September starts the discussion concerning the lows set in August 2004 and the bear market low set in October 2002. If you check out a monthly time frame, we are even getting to the point of relationships back to the January and March 2000 highs. This is the card the market is dealing us for the rest of the year. It all starts today.
Today is Monday, July 30. In market logic, we are in the 377 (Fibonacci) calendar day window off the July 2006 bottom. Tomorrow is the 260th trading bar off the same low. That means our plus or minus one margin of error window extends through Thursday (day 262) and if it really wants to stretch the rubber band, Friday. This window also comes at a time where several of these indices are at a 38% correction level with the run up from March. Last week we correctly identified the potential to correct for the entire week. Now that we have, we are also at a point where markets must decide the degree of trend taking place.
A smaller degree correction should respect the upcoming time windows at or near these 38% lines with March. Our pattern recognition scheme that I discuss here on a regular basis should be a great help in navigating these markets. If we don't get a low here, something much larger is going on. Really, the only calculation that caused these markets to turn down was the 89-day cycle with the March 14 pivot low. As I've told you many times, we have much larger cycle points coming up within a few weeks. So this 377 calendar day/261 trading bar low to low cycle is either going to be the point where the market makes its stand or we have to start shifting attention to the fact that one or more indices has put in an intermediate to long term top. That's what this week means.
As we head into the week, we've already seen the type of panic selling that is consistent with the end of moves, not the start of them. I find this very interesting considering charts like the NDX haven't even hit the 38% retracement with the March low. The Dow closed right on the 38% marker while the Nasdaq and S&P 500 have gone beyond. In terms of sentiment, the high reading for the week over 1.50 is the highest readings since the March low which got up to 1.70 and are actually higher than any readings we had in June or July of 2006. Recall that sell off was largely fueled by p/c readings that dropped with price action, implying options bulls were incorrectly buying the dip and showing a complete lack of respect for that correction. Now the situation is just the opposite. During this phase, p/c readings have steadily climbed as the selling has intensified. This is a major reason why I think we could bottom this week and reverse course once again.
This doesn't make me bullish. Moves off a high don't confirm a few days off the top. Its the technical retracement bounce that fails which confirms the turn. If we bounce here but it turns out to be one of those wedge shaped low volume affairs, look out below. For now, I'm still looking for a bigger top on a larger time cluster. However, while I'm cognizant that my time cycles act as leading indicators, I'm grounded enough to understand what the charts are telling me. What I look for is a strong cluster of price and time for important turns in the market. We have that here for a low.
In terms of the high that just passed, the only index that shows a decent cluster of price and time is the S&P 500. This is the only chart that hit and did not surpass a major price target. The S&P took out its all time high by a hair and could not meet the qualification of adding even a single bullish day to build a base on top of long term resistance. Folks, when we are talking about a seven-year time frame, the two points (1555 to 1553 rounded) is well within the margin of error to suggest a long term double top may be in place. However, the Nasdaq and Dow have fallen short of their next price targets near 2,800 and 14,563.
We are at important price and time support. We've been here before and the long bull market has pulled the rabbit out of the hat every single time. This time, it still has the potential to do so but its getting very late in the game. The fact the S&P 500 could not take out all time resistance is very important. But it is only a part of the picture. Longer and bigger tops are usually built on divergences and non confirmations. There are still too many possibilities to rule out yet another comeback. Keep in mind the Dow topped first in 2000 and the rest of the market topped two months later. It is very possible we get a reversal here one more time where the Dow and tech go on to their respective targets and not get confirmed by an S&P that can't get beyond resistance. We'll see soon enough.
Check out the August hard copy edition of Futures for my discussion of these cycles in “Tech Talk.” The book is doing well as feedback starts to come in from Europe to Australia. As markets get more volatile, gaining an edge becomes more critical to your success. “Breakthrough Strategies” can give you that edge and its available right here at the Futuresmag.com bookstore. If you haven't yet had the time to listen to my recent interview its available at www.fibonacciman.com.
