To understand what is going on in the stock market, we turn to the baseball races for an analogy. First we have the Phillies, doing their best bullish imitation. The Phillies have been counted out this year as many times as this bull has. They refused to die. The Mets represent the bearish set ups of this time period. The Mets are supposed to be the best team in the National League and like our time window that has materialized since early September, they've frittered away opportunity throughout the month. Then you have the Chicago Cubs, newly crowned winners of their division who represent the unexpected outcome.
In certain respected circles, there is a new outlook that considers the August low a four-year cycle low. I've stated in this space how the NYSE Bullish Percent indicator had reached the most oversold condition since the old bear market and I certainly have a respect for that. If we consider our cycles, the markets topped in July inside the 382 week high to high window with the March 2000 top in the S&P 500. In the bigger picture we did bottom between the 382 week window just discussed and this larger window we've been discussing all month and really since April.
Why am I talking about this now? I'm not predicting, but let's just say these respected technicians are correct (and if you want to know who they are, you'll have to tune in to Commodity Classics on MN1). If we don't get a top or a significant selling event by the middle of October that would mean the market has not elected this 261 week window. What does that imply? It would mean the markets are setting out on the unexpected outcome. At this point, the unexpected outcome would be Stock Market Bubble #2. Now I'm not saying this is going to happen, but if we just had a correction that lasted four weeks that is a four-year cycle low that would have to mean we are going much higher. Wouldn't you agree with that logic? The calendar is now turning from September to October and if something serious is going to happen, we have only 2-3 more weeks. If nothing were to happen inside this 261 week cycle, I'd have to come to the conclusion that whatever crisis may have been developing would have passed.
But we are not at that point yet. When I look back on the last big window in May 2006 where we had no less than six time relationships with the smallest on a daily scale lining up in a three-week period, that chart elected to stretch the rubber band to its maximum limit and did not start dropping until it hit the very last high probability date. The point is, if we are topping here what is likely to happen is price action will stay elevated until the vast majority finally get the impression it’s not going to drop after all. What that means in simple terms is the vast majority of bears are going to have give up their convictions. This can happen quickly. Markets tend to stretch the rubber band as far as possible so the maximum number of people give up on the possibility of such an event happening. If we are building to it last week can be characterized as one where the NQ gapped up most days and could only drop far enough to fill that gap. It is doing its job.
With this as the backdrop we are headed for another important week. The only problem with the four-year cycle low outlook is the larger pattern of this entire bull market. When we look at a chart of the NDX and draw trend lines on the upper channel from the January 2005 and 2006 highs through the July top, we are now bumping up against the upper end of this channel. When we draw a trend line from the summer lows of 2006 and now 2007 we have converging trend channels. Converging trend channels suggest a wedge and possibly and ending diagonal triangle. The upper trend channel for the NDX crosses at about 2100 and we are just about there. As we begin week 261 we are at channel resistance. I got news for you: this technical condition does not synchronize with a four-year cycle bottom. When I think of cycle bottoms they tend to be far away from important resistance areas. It’s for that reason this doesn't seem to be a four-year low but it can be, right? If it turns out that way the only conclusion that can be drawn is we may have a bubble materializing.
Keep in mind these are only inferences and when those of you who follow the Dow, we see the Transports lagging real badly. Those of you who follow tech know the SOX is lagging as well. Neither of these are close to testing the high. Forget the cycle picture and look at the technical landscape, this is not the kind of condition that breeds a big rally. Quite the opposite.
To start the week, it appears the SOX is in a small degree B wave triangle that is ready to complete. From the small degree high on September 19th, the SOX is ready to break out of a 55 hour triangle to the upside. This is a small degree triangle so it’s hard to say how far it can go and whether it will be muted by the overall condition of the NDX. The Dow and S&P 500 have also come up to 1.618 interwave resistance as well just short of their all time highs. On Thursday night I suggested we would have a down-up sequence. Friday started the down but I suspect there will still be another surge attempt to the upside. Keep in mind if we are in late stages of an ending diagonal triangle, it usually completes with a blow off spike. We haven't had that yet. This week I'll be in the usual places. However, the updates will come from my Website as opposed to the AOL address. You can also check out traderinterviews.com to hear an interview I did with Tim Bourquin, co-founder of Traders Expo.
