My shorts are on fire but maybe there's hope.
Technical Analysis
Signs of a First-Quarter High
By Jeff Cooper
Street Insight Contributor
1/12/2006 7:25 AM EST
URL: thestreet.com
Technical Analysis
Although the uptrend is undeniable, the market typically has a 10% correction every 19 months.
There has not been a 10% correction in four years.
Many market participants may be getting lulled into a sense of false security and complacency.
While the January barometer has the bulls clamoring that a big up year is a fait accompli, and with the bears' fur smoldering, few are mentioning that the barometer failed to be very useful as a forecasting tool for 2005. Furthermore, few mentioned that the record of the January barometer in midterm election years -- of which 2006 is one -- is poor.
I am not raining on the parade, as I have been bullish since late October. I am just pointing out the facts. We do not want to hang out on any rotten limbs. The most important thing in the market is what is going on in the here and now. Sure, history is a guide. Sure, patterns repeat. But it is the current cycle and the current price action that must dictate our trading posture, because the market can do anything at any time and often, perversely, does just that.
The breakout above 1275 on the S&P 500 indicates a minimum move to 1310 and a potential run to 1340/1350. But before the euphoria gets to be too much, there are some cyclical and technical factors that point to a possible first-quarter high. Furthermore, the tight trading ranges of the indices in both 2004 and 2005 suggest an expansion of volatility in 2006. Although the current uptrend is undeniable, we must keep in mind that typically the market experiences a 10% correction every 19 months. We have not had a 10% correction in four years.
The combination of the 2004/2005 lack of volatility and the lack of a 10% correction during the past four years means that many market participants may be getting lulled into a sense of false security and complacency, and are being spurred into aggressive buying and chasing of equities.
Over the past week, I have mentioned the "vibration" of 1136 S&P to the first week of January, and the fact that 1275 represents 1440 degrees up on the Square of Nine Calculator from the 2002 bear market low. Constructively, the market has moved convincingly higher after the first week of January, and convincingly above this 1275 S&P benchmark.
Now, let's take a look at the four-year and the 10-year cycles, or decennial pattern.
On the chart (at the end of the column) of 2002, note the double-top pattern in the first quarter. There was a high on Jan. 7 and a high in mid-March. The important thing to understand is that cycles are not static. They expand and contract like a spiral. Consequently, on the four-year cycle, the big Sept. 21, 2001, low probably correlates to our mid-October low in 2005, which gives a three-week offset or translation. Consequently, a Jan. 7, 2002, top may stretch out and translate into a turning point near Jan. 29, 2006. Likewise, the mid-March 2002 top may translate three weeks later to around April 10, of this year.
On the 10-year cycle from 1996, there was a turning point in the first week of January as well. Then there were turning points in mid-February, the first week of May, May 23, July 2, and July 24. Interestingly, the July 24 turning point corresponds to the July 2002 low in the four-year cycle. Finally, there is a big low in the first week of September in the 10-year decennial pattern. 1996 traces out a basically bullish year. But at the same time, it is important to note that from mid-February, the market went more or less sideways for six months.
Another reason to be on guard for a potential spike and reversal pattern in the first quarter is the 100-year cycle. This is because 1903 was a bear market low analogous to our March 2003 low. The market marched up into January 1906, when it topped prior to the natural catastrophe of the great San Francisco earthquake. Subsequent to that, the market crashed in the rich man's panic of 1907.
Conclusion: As a short-term trader, current price action is the final arbiter. But a study of cycles and past patterns has allowed me to anticipate many turns -- especially when the Street is embracing a universality of sentiment -- either bullish or bearish. |
