All aspects of the market cycle between extremes. That’s true of price, of course, but also of other measures: Volume, volatility and the degree to which price moves sideways (“choppiness”) or vertically (“trendiing.”)
All combinations occur: High volume and high-volatility (trendless) chop, low-volatility and low-volume trends, high-volume, low-volatility trends, etc. Each such combination has different characteristics, and so requires different trading plans and trading strategies.
To be consistently profitable, you have to know the type of market you’re trading–the “weather conditions,” if you will–and use trading plans and strategies known to be effective for those conditions. Just like a boat captain or airplane pilot prepares and plans his excursion based on the weather, a trader should pay attention to market type: Narrow or wide range? Inside or outside the previous range? Choppy or trending? High or low volume?
I have my own proprietary indicators that help me determine the type of market. Some of them are shown in the linked chart.
From Reven Wood’s blog:
When I was a losing trader I would interpret a large bid coming in as strength and would go long, then have to add, then get stopped out 9 out of 10 times. I did this for 15 years until I realized I was seeing the trade completely backwards. I have to give credit to my trade journal for pointing it out. This trade is against everything we learned in ECON 201. The rules of supply and demand are tested in this clear example of panic from wrong way traders.
In the last newsletter, I looked for a resumption of the rally and, once again, the market obliged! After a final dip to 1203 last Monday (my projection for a low on the SPX was 1200-1205), the index took off and closed the week at the high of the move, rallying 62 points!
My Point & Figure analysis had indicated an initial pause at 1251, but when it became obvious that the index wanted to go higher, 1263-1265 came into play. Since the SPX closed at 1265 on Friday, we have to assume that the move is probably done, although the momentum may cause it to spill over into some weak count up to 1270. This will be determined when the market resumes trading.
What normally follows the realization of a projection, is a wave of profit-taking which causes temporary supply and a pullback in prices. I expect a near-term peak to be reached, perhaps as early as Tuesday. Correction from that level should be short-lived, but could last a few days. If I tried to forecast a retracement level at this time, I would be guessing. I will not be able to give a correct estimate until the move has been completed.
Of all the indices, the DJIA has had the strongest rally. It overcome its October 28 close by thirty points and its December close by nearly a hundred points. This may encourage some additional buying after the holiday. If so, the SPX would follow suit and rise above its December intra-day high of 1267. This is why we need to wait until Tuesday to put a price on the rally top.
Last week’s market action is bullish in itself, but possibly even more bullish is that, by overcoming its October and December tops, the DJIA is giving some credibility to the potential inverse Head & Shoulders pattern which formed over that time frame. (We’ll analyze this and other technical factors next, in the Daily Chart of the DJIA.) My projection for the entire rally from 1075 is at least 1293. If this turns out to be the top of minor wave 2, as is expected by many EW analysts, it should be followed by a serious decline. If it is not, the appraisal of the longer-term structure will have to be revised.
Last week, the headline was: “A LITTLE MORE CONSOLIDATION?”, which turned out to be correct with the SPX losing another 45 points before finding support.
What now? Last week’s prediction was predicated on cycles bottoming early next week. These cycles exerted steady pressure during the beginning of the week, but by Thursday, the SPX was starting to resist the downtrend, and this was the case on Friday as well. One reason for this action was the fact that the P&F chart had given a phase count to 1212. On Thursday, the SPX found support just below the projection target at 1210, re-tested it, and held above that level for the rest of the week.
Although this may suggest that a correction low has been made, what is more likely is that the total distribution phase count to about 1205 will be met, with the possibility of a further decline to 1195. Since cycles are due to bottom early next week, this makes more sense than forming a base above 1210.
Should this take place, the market would then be in a position to extend the wave “C” rally which started at 1159. It may have only a limited time window to do so. According to Raymond Merriman, the renown financial astrologer, astrological signs will become unfavorable to the stock market by the end of the month. Since the SPX will have to travel 90 to 100 points just to get to the former 1292 high, if he is right, it will be a challenge to do so in such a short amount of time.
On the other hand, astrology aside, the technical picture of the SPX looks favorable. As you will see on the chart, the index may be in the process of making a significant inverted Head & Shoulders pattern which would be confirmed if it can rise above 1267. Next week, if the base pattern is complete and the SPX has reversed, we can gauge by the size of the base how far the rally can travel. Previous projections have suggested about 1314, and even higher. That will be confirmed (or not) by the base pattern which is currently under construction. At this point, it looks as if the SPX will have to hold off reversing until about the middle of next week so that the accumulation pattern can be extended enough to confirm the former projections.
Last week’s headline was : “WAVE C DUE FOR A PAUSE”. The SPX obliged by surrendering 36 points into Friday morning, after which it rallied for the rest of the day and closed near its high. So! Are we ready to push ahead with Wave C?
Perhaps not right away. Although Friday’s action was bullish, and the index closed near its high of the day, it’s possible that the consolidation is not quite over. At best, this would be wave 1 of the new uptrend, with a wave 2 pull-back before the SPX is ready to surpass its 1267 high. At worst — and cycles seem to argue for this scenario — the consolidation could extend for another week or so before the index is ready to challenge its short-term high.
Over the intermediate term, it remains likely that we are in a wave “C” rally from 1075, and that we have completed its first phase at 1267. But if my instincts are right, Friday’s rally may only be the mid-point of the consolidation. If so, that would mean an extension of range-bound trading, followed by the genuine resumption of the wave “C” uptrend. 1231 is a strong support level and is not likely to be broken.
It sounds as if I speak of wave “C” as if it is already etched in stone. Actually, I have learned to keep an open mind about structure and to “go with the flow”. If we have a nasty decline after completing this “wave C”, then we can be fairly certain that the bear market has resumed. If not, I’ll have to re-adjust my thinking.
The near-term trend will be decided by what happens on Monday. A P&F projection is looking for a move to 1260-1261, followed by a pull-back with 1231 likely to hold.
The rally which started at 1075 in early October had a 218-point rally to 1292 in less than four weeks before pausing. That’s a lot of strength which has a lot of former bear market advocates beginning to change their minds. After a ten-day correction which retraced less than .382 of the uptrend, it looks as if the SPX may be ready to extend its move to the low 1300’s (see pink box on the chart below).
That would be the logical target. Several trend lines which, collectively, should provide some resistance come together in that area, and they coincide with a P&F count derived from the base which was formed just above 1220.
After this target is reached, it should be followed by another correction, but that is not likely to be the end of the move. Besides the obvious strength in the index, the consolidation which started in early August and lasted into early October created an enormous accumulation base which can lead to higher prices, perhaps even new index highs.
That base has also proven to be an area of strong support. The pull-back from 1292 could not even penetrate the higher layer of the congestion level, and the consolidation formed at its very top. On the Point & Figure chart, that accumulation base is clearly far more substantial than the distribution pattern that was formed at the 1371 top – although it does not look like it on the bar chart. One of the P&F tenets is that when an accumulation base is bigger than the preceding distribution top, the next move should carry to a new high. We’ll see if this holds up in this case. In the meantime, as long as we don’t see some real weakness coming into the market, it is probably best not to be too bearish.