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Market Turns Advisory 9/27/4


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#1 TTHQ Staff

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Posted 27 September 2004 - 04:41 PM

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S&P 500 CASH

SPX CASH: 5-Day ProjectedSupport and Resistance levels: High - 1121; Low - 1097
DEC SP: 5-Day Projected Support and Resistance levels: High - 1120; Low -1096
SPX CASH: MonthlyProjected Support and Resistance levels: High - 1131; Low - 1082
SPX CASH: Yearly Projected Support and Resistancelevels: High - 1274; Low - 950

From last week: "Shorter term, from the notes last weekend weknow that the smallest daily cycle that is due to peak out here is the 45 day component -and that the odds favored that this cycle would not peak before the 23 trading day mark.Once the 45 day cycle does put in a peak here we know that odds will favor a correction inthe 2.9% range or better off the top, as the minimum decline for this 45 day cyclecomponent in recent years has been 2.9%, as shown on the statistical table at right. Whatlevel this component actually peaks at for now is an unknown, though most solid short termresistance is currently in a range between the 1135-1155 region and thus could be theprime spot to do it."

Current analysis: Last week the SPX continued to make new swing highsfor the move, tagging 1131.54 on an early week high. From there prices reversed solidlylower into mid-week, proceeding to close below the prior week’s low of 1119.74 SPXCASH, which was viewed as a bearish indication - especially in light of the fact that the45 day cycle was in the vicinity of a market top-out in this timeframe. Thus, right now Iam viewing the 45 day cycle peak in place at the 1131.54 swing top, and a correction southwith this component now in progress into what is projected to be early to mid- October ofthis year. In terms of price, a 3-4% correction off the top is the norm for this cycle,which means a probable test of the 1085-1098 region in the coming week or two.

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The Cycles

From the cyclic table on page 1, the 45 day cycle is now 29 trading daysalong and is now viewed as bearish here and ikely topped at the 1131.54 swing high fromlast week. The larger 90, 180, 360 day cycles are all also viewed as 29 trading daysalong. In terms of open price projections, there is still an outstanding upside targetfrom the 90 day cycle to 1151-1172 SPX CASH, which is good through early November - andwill remain valid as long as the 1060 swing low is not taken out on an intraday basis. Forthe 1080 day (four year) cycle component there is also still the outstanding upside targetto the 1238-1270 range, which is valid through the first half of 2005.

From the notes from recent  weeks, if the larger cycles above it werephased correctly  then odds favored that the 45 day cycle would see bullish righttranslation for this move -  in other words, peaking past half it’s phase. Ithas indeed  done that, peaking in 26 trading days from the August lows, which is overhalf it’s current phasing of45 trading days. On our chart above you can also see thatthe oscillator that tracks this 45 day cycle component has now rolled over to thedownside; this same oscillator should ideally move back below it’s lower referenceline in the coming week or two as this cycle bottoms out. Taking out last week’s1108.05 SPX CASH low to the downside this week will be an additional confirmation that thedown phase of this 45 day cycle is in progress. As per above, the smallest drop that thiscomponent’s down phase has seen in the last few years has been 2.9%, while 6 out of 8(75%) of the samples shown on the table on the following page have seen drops of 3.8% ormore. The average of all drops shown is 4.4%. In other words, provided the 1131.54 swingtop holds the action in the next two weeks, then we have to expect a correction in the2.9% to 4.4% range will be seen, with a time target of October 8-14, 2004 - which is whenthis 45 day cycle is projecting it’s next low to occur.

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Also, if we go to our statistical table here and note the more bullishlytranslated cycles we can note that the drops with time tend to fall into the 2-17 tradingday range before the cycle bottoms out. On the next page I have also posted the Fourierchart again, which is still projecting a combined low with the daily cycles to occur nearOctober 8, but can be plus or minus a  few days in either direction.

Going to a Fibonacci analysis of the  SPX CASH index there are alsosome notes here as well. A 50% retracement of this swing up would target a test of 1096SPX CASH, while a 61% retracement would target a test of the 1086-1087 range - bothnumbers of which are right in the normal range of corrections that the 45 day cycle willnormally see. The one thing that I did not like here with this 45 day cycle is that it didnot reach the 7% rally region which is the minimum that the first 45 day cycle up phaseshave seen following a 180 day cycle low. Ideally, we would rather have seen a pricepeak at or above the 1138 area on this index before this cyclic component peaked out -and the fact that we did not is at least a note for some caution here. A key area on theFib chart is  the 78% retracement, which currently comes in near the 1076 region;this is often the ‘last bastion’ of support to a move, and so we would not wantto see this number closed below on the current 45 day cycle down phase. On the same note,if 1060 were to be closed below then the move over is up and a much larger peakwould be expected to be in place. Going to the upper chart on the following page is thesame Fourier projection chart shown in last weekend’s outlook and notes theapproximate position of the 45 day cycle in the lower sine wave - along with the combinedforecast in green on the price chart. This forecast shows all cycles 90 days and less anddoes not include the larger 180, 360 and 1080 day cycles, as adding these would tend to‘skew’ the forecast. Right now we are viewing the 180 and 360 day lows in placeat the August price/time bottom, and, if correct, then the smallest cycle labeled asbearish is the 45 day component - and thus should give us our next bottom. Once this 45day cycle bottom is in place (ideally as close to October 8 as possible) and has corrected2.9% or more off the top, then we will be looking for indications to move back into ourmid-term longs on the indexes, most of which were excited near the 1131 area in the dailyoutlooks earlier this week.

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The 180 and 360 day cycles

As per the notes from recent weeks, if the larger cycles are pointed upthen we know that the normal up phases of the 360 day cycle have seen rallies of 20% orgreater in recent years - which would tell us that the 1163 swing top from earlier thisyear should be taken out to the upside in the coming weeks/months with the upward phasesof the 180, 360 and 1080 day cycles. On our monthly chart we would view this as a wave 5in Elliott-wave, which would be expected to peak not only the 180 and 360 day cycles, butthe larger 1080 day (four year) cycle as  well. The top of the extrapolated 180 cyclechannel right now is projected to come in between January and April of 2005 and would alsotarget a test of the 1238-1270 region or higher, as suggested by the normal percentagerallies off the low with the 360 day cycle. (Note: as the months progress thechannel’s extrapolated path will likely have to be re-adjusted to account for newprice information). From the next peak then with the 180, 360 and 1080 day cycles we wouldbegin at least a steep 3-wave decline to either re-test or make new lows going into thenext four year (1080 day) cycle low that is due in the Autumn of 2006, and that dropshould make a re-test of the 768 swing low made in 2002 - with at the very least thepotential for the index going below the 768 area at that low if the bottom for the larger18 and 36 year cycles is still out there.

The 4 Year Cycle

The last four year (1080 day) cycle bottomed in October, 2002 and shouldbottom next in the Autumn of 2006 - and ideally will make it’s peak either later thisyear or (preferred) at some point in the Spring of 2005. From a statistical analysis ofthis cycle we know that the normal bounces for a four-year cycle - even if that cycle goeson to make eventual new lows - have been averaging a 50%- 66% upside retracement of theprior swing down before the upward phase of this cycle is finished. A 50% retrace targeted1160 or higher, while a 66% retracement would target a run as high as 1285. While I havemy doubts that we would ever get as high as 1285 SPX CASH here, we do have the outstandingupside projection from this cycle to the 1238 range or higher, which is still valid as ofthis writing.

The 9, 18, 36 and 72 Year Cycles

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For the bigger cycles, in regards to the 8-9 year cycle it also bottomedat the October 2002 lows and is headed up for the time being. The last low for the larger18-year cycle was at the 1987 market  crash, with the next low due in 2005-2006; inother words where the next four-year cycle should also make it’s bottom. Above the18-year cycle there is a 36-year component that last bottomed in 1974 and is due for thenext bottom near 2010, plus or minus a few years, but again - should make a bottom withthe 18 year cycle. Every  second 36-year low is also a 72- year bottom - which lastoccurred in 1932 - and should  bottom with the next 18 and 36-year cycle lows. Takingthe 18 year low bottom in 1987 we get the year 2005 - plus or minus 3 years - as the next scheduled low for this cycle. Taking the last 36 year low in 1974 and we get2010, plus or minus 8 years, as the next scheduled bottom for this component. Projectingfrom the last 72 year low in 1932  nd we come up with the year 2004, plus or minus 14years. The ‘clustering window’ of 2002- 2008 is where the most of these cyclebottoming windows overlap each other (cluster) together and is the highest probability ofall of these years for the combo of the 18, 36 and 72 year cycles to bottom out; all ofthe above are shown again on the chart above.

In the last 9-12 months I have made cases for both the 2002 low being‘the’ low for the combo of the 4, 18, 36 and 72 year cycles, as all of thesewould be inside this ‘clustering’ window of 2002-2008 where these componentscould form their lows. I have also made the same evidence that the low for these cyclesis still out there and will be made at the 2006 low or further out. The biggestevidence for a low that is still out there is in regards to the 4 year cycle patternswithin the larger 18 year cycle. As noted several months back, in going back over pastdata with this 18 year cycle, what I found was that 80% of the time this 18 year cyclecarried within it 5 rotations of the four year cycle; an example of this pattern is shownin the chart above, which notes the 5 rotations inside the 18 year cycle from the1950’s on up to the 18 year low that occurred in 1974, and is a good example of howthis pattern has played itself out in the past. I should also note that the only time wedid not see the 5 phase pattern occur was at the last 18 year cycle bottom in 1987.If odds tend to favor another 5 phase pattern with the four year cycle - again, as 80% ofall occurrences have done - then we would be expected to be in that terminal fifthphase right now. The low to low from 1987 to 1990 was four year cycle #1, with #2coming at the 1994 bottom. #3 would have been with 1998 low, and then #4 obviously themost recent four year cycle low in 2002. That puts us in #5 right now - which I shouldnote assumes again that we are going to see the same pattern with the 18 year cycle thathas been seen since that late-1800’s. This is all noted and shown on the lower chartfrom the prior page, which is a slightly detrended version of the SPX CASH index on amonthly scale, to better ferret out the 4 year cycle here.

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With the above said and noted, I decided this weekend again to re-note howthe market acted within that terminal fifth four year cycle within the larger 18 yearcycle - as the larger 18 year cycle was working on a low. Going to statistics, the averagerally with the four year cycle (while in the fifth phase of a larger 18 year cycle) was98%, with the smallest being the 29% rally off the 1911 four year cycle bottom. Thelargest was a 256% gain, which came off the 1982 low and into the following four yearcycle top in August of 1987. Throwing out these smallest (29%) and largest (256%) figuresgives us a median average rise of 68%. How long in terms of time did this take? Studieswith the four year cycle have shown that four year up-phases that do not exceed the priorfour year cycle top tend to rise about 24 months on average before topping out. However,in analyzing only those actual fifth phases of the four year cycle, the average wasa bit longer, averaging 30 months from bottom to top. Equating that again to the October2002 low, that would give us a four year cycle peak near April of 2005, but again I shouldnote that this is only the average; the smallest up phase was 5 months, while the one thattook the longest was 60 months (no typo, an extended cycle) - in other words a very widevariance here. Even throwing out the smallest and largest figures a median time advance of29 months ended up as the average. Note that a 29-30 month top with the above notes wouldput us into the March/April 2005 region, which lines up almost perfectly with the channelextrapolation presented earlier with the 180, 360 and 1080 day cycles. What then about thedown phases of the same fifth-phase four year cycle inside the 18 year cycle? If theaverage rally was 68%, then how far did this four year cycle tend to drop once the upphase was complete? The average drop was 46%, with the average median drop beingvery close to that at 43%; this is also noted and shown on the statistical chart from theprior page. Taking that into current context with price, this means that the SPX couldactually rally into the 1290’s (a 68% advance) - and yet still see new swing lowsat the next 4 and 18 year conjunction in 2006 (a 43% drop from 1290 would equal 736SPX CASH). Although this is hard to imagine, it is absolutely the normal pattern.

In going inside these ‘5 phase’ patterns with the four yearcycle, there were three that saw the four year cycle bottoming below the prior four yearlow, with only one actually holding above the prior four year cycle bottom. Meaning that,if we are indeed within the last four year cycle within the 18 year cycle, then odds are75% in favor of lower lows at the next four year cycle bottom - which we know is duearound the Autumn of 2006. With then all of the above said and noted, I am now leaning infavor of this path - which means new swing highs going into the current four year cycletop (ideally made in the Spring of 2005) and then dropping to or even to new lows below768 at the following four year cycle low in 2006. This pathway lines up better withLarry’s longer-term work with the delta cycles and seems the most logical path forthe indexes to take between now and 2006.

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Election-Year Seasonality

As per the notes from recent weeks, for the month of September in electionyear 7 out of 10 of these (70%) have closed higher for the month by an average of 1.6%;looking at only the months that closed higher, the average up close was 3.1%. Theseseasonal numbers would imply high-odds that a close in the 1121 range or betterat the lasttrading day of September, and at least better-than-average odds that a close as high as1138 will be seen. Since this is the last trading week of the month and we are currentlybelow both of these levels, it is going to be interesting to see how this plays out in thecoming sessions.

Very possible we could reverse higher off an early-week low to end themonth above the 1121 area as suggested by the seasonal studies; the good news is that wedon’t have long to find out.

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Looking ahead at the month of October in election year, 70% of these inelectionyear have closed higher as well, by an average of .07%. Again, going to onlythemonths that have ended higher the numbers are a bit stronger, with the averageelection-year October ending the month to the upside by 1.4%. Going to some intra-monthstatistics here, 80% of election-year Octobers have seen rallies from the monthly open ofat least 1.3%, while 70% have seen rallies of 1.5%. As for intra-month drops, 80% havewitnessed drops of .06% or better from the monthly opening levels, while 60% have seendrops of 1.1% or more. As with the seasonal stats  for the month of September, theodds tend to favor that October ends the month higher (70% probabilities); since we haveyet to see how the current month closes, we will apply the stats above to the numbers nextweekend, after the current monthly closing numbers are known. Stay tuned.

SPX Trader Commitments Analysis

S&P commercials covered 7,119 shorts last week, which brings theircurrent net short total down to 20,814 contracts as of last Tuesday’s close. Inrecent weeks I had thought that the best time for the commercials here to flip to the longside would be at September futures expiry; the fact that they did not do so has morebearish connotations than bullish ones for the coming weeks - but overall the suggestioncould indicated more sideways type movement more than anything. I should add here that themarket has never experienced a major rally without the commercials being along for theride, so it is imperative that this group move to a net long position in the comingweeks/months if the rally to new swing highs is going to come as is the expectation.

NASDAQ 100 CASH

5-Day Projected Support and Resistance levels: High, 1419 - Low, 1376
Monthly Projected Support and Resistance levels: High, 1388 - Low, 1281
Yearly Projected Support and Resistance levels: High -1738; Low - 1203

Last weekend: "As with the SPX, the odds will favor bullishright translation will be seen for this index as well with both the 45 and 90 day cycleshere, which means a higher high should be coming on this index in the next few days. Lastweek’s intra-week top tagged 1435.95 on the NDX and is close to the 200 day movingaverage - which still should be acting as the price attractor on this index after whatshould be a consolidation lower into Monday or Tuesday of the new trading week. Shorttermsupport is still the 20 day moving average here on up to the 1419 weekly projected supportlow, which should act as support as the index works it’s way towards a test of the1440 region or higher in the next few days. The smaller 45 day cycle is probably soon dueto peak out, but the suggestion is that this cycle will not peak out on the indexes untilat least later this week."

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Current analysis: Last weekend I noted that odds favored that the NDXhad not seen it’s high for the move, and that a run back to the 1440 area lookedlikely. That 1440 area was also the 200 day moving average on this index, which stoppedthe rally cold and then just as quickly turned this index lower and proceeded to closebelow the prior week’s 1412 weekly bottom on a daily close; this to me signifies thedown phase of the l45 day cycle component should be in progress. As well, the time top forthis 45 day cycle up phase last week did not look satisfied, as odds favored a peak past  the 23 trading day mark here; we got that as well, with the actual 1440 price peakso far coming in 26 trading days from the August lows. If the 45 day cycle down phase isin progress now on this index, then the expectation would be for the index to retrace atleast back to it’s 45 day moving average, which is currently at the 1378 area and isshown in magenta on the chart above. Going to the statistical table with the 45 day cycledown phases on this index we see that the minimum drop with this cycle in recent yearshere has been 5% decline from the 1440 swing top would end up targeting a possible test ofthe 1368 area in the next week or two as the 45 day cycle bottoms out. In terms of time,the best spot for a low-out with this 45 day component may again be this October 8-14timeframe. The basic ottom line here then is new short term  resistance is now at the1420 region; if  that holds the upside then look for prices to make a try at the1368-1378 region in the next week or two as the 45 day cycle bottoms out. From there wewill be on the lookout for prices then to firm back up and head back to new swing highsfor the move as the larger 90 day cycle tops out in late October or early November.We’ll see how the new week plays out and then take another look at all next weekend.

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NDX Trader Commitments Analysis

NDX commercials actually added a good chunk of longs, tacking on avery-aggressive 19,229 contracts, which brings their current net long total up to 23,703contracts as of the closing of trading last Tuesday. This could be a more bullishdevelopment for this index, but the problem here is that the NDX commercials are not thesmart money that the SPX group is considered to be. Having said that, if bottomingindications from the 45 day cycle are seen in the next week or so, then the action fromthe hedgers would have me being more aggressive on the long side on this index as opposedto the other indexes. The ‘value’ area to me here is any move below 1368 NDXCASH; in other words I view as any move below this number as the hot spot to accumulatelong positions.

DJIA/DOW INDUSTRIALS

5-Day Projected Support and Resistance levels: Projected High, 10166 -Projected low, 9913
Monthly Projected Support and Resistance levels: Projected High, 10644 - Projected low,10065
Yearly Projected Support and Resistance levels: Projected High, 10,406 - Projected low,9978

Last weekend: "there is an outstanding upside target with the45 day cycle to 10,440-10,560, which should continue to make the DJIA a good buy on anydips lower. For the new week we have a new weekly projected support low of 10,257, whichis also again right at the 200 day moving average; look for these to hold off anynear-term drops lower and for the index to try and reassert itself to the upside onceagain for a try at the highs for the move, with the 10,343 weekly projected resistancehigh acting as an upside magnet for price - along with the 10,363 swing top from a week ortwo back."

Current analysis: The DJIA actually ended up taking out both 50 and200 day moving average support; the same will now act as short-term resistance to any movehigher - as well as the new weekly projected resistance high of 10,166. If these hold anynew rally higher, then look for the index to continue to probe the low end of the range asthe 45 day cycle works on a low in the next two weeks. Having noted the above, the indexis still bullish coming off the August lows and should still be  headed higher intoearly next year. There is also still the outstanding cyclic upside target to 10,440-10,560, which I incorrectly noted as a target with the 45 day cycle; it’s actuallythe upside target for the 90 day cycle component, which is good through early November.Thus, the current drop should be used as a buying opportunity with the DJIA - even thoughthe decline is not yet likely finished. Look for a bottom between October 8-14, 2004, tobe followed by a run to new swing highs for the move going into November.

 

Jim Curry
Email: jcurry@cycle-wave.com