Elliott Wave expert utilizes long and near-term cycles analysis to map the Dow's direction: Tony Caldaro's OEW update

The Dow and its companion major indices, like the S&P 500 and the Nasdaq Compq and Nasdaq 100, should be shaping up for a consolidation or moderate correction sometime over the next few weeks, followed by another rise into January. At least that's how I read Tony Caldaro's update; but be sure to read it yourself below, to really understand not only that but the bigger picture for the stock markets the rest of this year and the years ahead. Tony's Elliott Wave work is objective, his approach methodical - and his practice of employing other techniques to triangulate on the most likely outcomes is much appreciated. This weekend he's presenting ways to see how time cycles can be analyzed in order to gauge the stock markets' path.

A few weeks ago Tony changed his website URL for "the ELLIOTT WAVE Lives On"/Objective Elliott Wave, so update your bookmarks accordingly. The Objective Elliott Wave concepts of Tony Caldaro help measure out the market's movements, trend, and probabilities. We appreciate being able to feature Tony's weekend updates. They're full of insightful analysis, which is also why we keep his site and daily updates feed at the right side of the page (thanks again Tony!). Let's find out what he's seeing and saying in this weekend's update:
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the Elliott Wave Lives On
http://caldaro.wordpress.com/2010/10/30/weekend-update-265/
by Tony Caldaro
October 30, 2010

weekend update

REVIEW

For the first time in quite a while positive weekly economic reports outweighed negative reports by over three to one. The market responded, before the reports, with a new uptrend high and then went sideways during the reports. On the negative side. We had a lower rise in the Case-Shiller index, a decline in the UofM consumer sentiment and the M1 multiplier. On the postive side. Existing/new homes sales rose as did the FHFA price index and weekly mortgage applications. Q3 GDP rose, along with durable goods orders, the Chicago PMI and consumer confidence. Weekly jobless claims declined and the WLEI continued to move higher. The stock market, however, remained in a trading range. The SPX/DOW were -0.05%, and the NDX/NAZ were +1.05%. Asian markets lost 0.9%, European markets lost 0.7%, the Commodity equity group gained 0.2%, and the DJ World index was flat. Bonds were -0.1%, Crude lost 0.3%, Gold gained 2.3%, and the USD was -0.6%. Next week will be highlighted by tuesday elections, the FOMC statement on wednesday, and the Payrolls report on friday. Best to your week!

LONG TERM: bull market

While the medium term trend remains up and the short term continues its sideways with a upward bias movement, we continue to step back and look at the bigger picture again this week. Last week we covered the US and various foreign markets, illustrating how their bullish wave patterns look quite similar:http://caldaro.wordpress.com/2010/10/23/weekend-update-264/. This week we will view the US stock market from a time cycles perspective.

The time cycles we follow occur on a regular basis and last from two to thirty-four years. They are typically measured from bottom to bottom. This determines the length of the cycle. After a bottom a cycle will exert upside momentum on the stock market, and then downside pressure after they top. The most commonly known time cycle, in the US, is the 4 year Presidential cycle. We first wrote about this cycle back in mid-2006, when it was bottoming. The chart below displays the effect of a 4 year cycle bottom going back to 1980. This cycle has been operative since 1934. Observe how it usually bottoms at important stock market lows, i.e. 1982, 1990, 1994, 1998 and 2002. The two other times, 1986 and 2006, the cycle low occurred more than a year before the stock market hit an important high. We wrote about its upcoming low in May 2010:http://caldaro.wordpress.com/2010/05/24/the-4-year-cycle/. The four year Presidential cycle bottomed in July 2010.

The next two time cycles we will examine are two we found using OEW analysis. The first one is the 34 year Secular cycle. This time cycle is similarly aligned with the 34 year commodity cycle, which we have discussed from time to time since we uncovered that one. This cycle has been quite regular since the 1949 stock market low. It rises for about 18 years and then declines for about 16 years. Please observe on the chart below the secular bull markets: 1949-1967 and 1982-2000. Then the secular bear markets: 1929-1949, 1967-1982 and 2000-2016 est. This cycle suggests we have been in a secular bear market since the year 2000 which should last until around 2016. So why are we bullish?

Secular bear markets are about 16 years in duration and exhibit a pattern within the down cycle. First, the stock market makes an important peak about 6 – 8 years into the cycle: 1937, 1973 and 2007. Second, the stock market then makes an important low about 6 – 8 years before the cycle ends: 1942, 1974 and 2009. This low is never revisited again as the market starts working its way higher/sideways until the cycle ends. March 2009 was the stock market price low for the 34 year Secular cycle.

The third cycle we will review is the two year Tech Product cycle. This cycle is based on technology and we use the SOX (semiconductor) index to track it. We reported on this cycle recently in a special report: the SPX (S&P 500) with SOX (semiconductor index): http://caldaro.wordpress.com/2010/09/15/the-spx-with-sox/. The chart below displays how the 2 year tech product cycle works in conjuction with the 4 year presidential cycle. Observe the regular two year cycle lows in 1994, 1996 and 1998. Then again in 2002, 2004 and 2006. The 2 year cycle low in 2000 created a bounce for only two months during the dotcom meltdown. Now notice the low in 2008 and the recent low in August 2010. Every two year cycle low has led to a surge in the stock market lasting for more than one year.

In summary, we are in the bearish part of the 34 year secular cycle but the actual price low already occurred in March 2009. Currently there is an upward bias lasting until around 2012/2013. With the 4 year presidential cycle bottoming in July 2010, and the 2 year tech product cycle bottoming in August 2010. There is additional upside momentum from both of these cycles as well. We continue to be bullish into at least 2012.

MEDIUM TERM: uptrend new high at SPX 1196

The uptrend that started at the early July low at SPX 1011 has run into some resistance here at the OEW 1187 pivot. We have been counting this uptrend as Major wave 1 of Primary wave III of this five Primary wave bull market. As you can observe from the chart below we have counted this bull market as having completed Primary wave I in April 2010 at SPX 1220, after it completed five Major waves up from the March 2009 at SPX 1011 low. Then the market declined about 17% into the July SPX 1011 low, ending Primary wave II.

During this uptrend Major wave 1 has been subdividing into five Intermediate waves. Intermediate wave one ended at SPX 1129 in early August. This was followed by Intermediate wave two at SPX 1040 into the end of August. Intermediate wave three hit a new high at this week at SPX 1196.

As you will have observed, we are also counting the internal structure of Intermediate wave three with five Minor waves. The recent high at SPX 1196 is sufficent to meet the minimum required for the completion of Intermediate wave three. However, we are expecting something closer to the OEW 1222 pivot, which ended Primary wave I. After we do get a pullback for Intermediate wave four, which should find support between the OEW 1136 and 1168 pivots. Then Intermediate wave five should be underway until around January 2011.

SHORT TERM

Support for the SPX remains at 1176 and then 1168, with resistance at 1187 and then 1222. Short term momentum ended the week at neutral. For the past three weeks, when the SPX hit 1184 this market has struggled to break through and hold the OEW 1187 pivot. We had a momentary breakthrough early monday but it failed to hold. During this three week period the market has experienced four pullbacks, between 17 and 26 points, after each new marginal uptrend high. These types of pullbacks have been quite normal during Intermediate wave three. As a result of this choppiness we are maintaining three short term counts: two on the SPX hourly and one on the DOW hourly. Use the link below to access those charts.

When observing the technicals we find some weakness in the daily MACD, and a negative divergence in the daily RSI. On a weekly basis, the RSI is starting to display an overbought condition for this uptrend. The financial sector is also showing some weakness with the XLF already in a downtrend. The KBE (major banks) and KRE (regional banks) have been weakening as well. All other eight sectors, of the SPX's nine sectors, look fine.

With the tuesday election and the wednesday FOMC statement, we should get a resolution to the short term count this week. A close above the OEW 1187 pivot should clear the way for higher prices short term. A break below the OEW 1176 pivot range would likely indicate this uptrend has entered Intermediate wave four. Best to your trading!

FOREIGN MARKETS

Asian markets were mixed on the week for a net loss of 0.9%. All indices are in uptrends but India's BSE and Japan's NIKK are displaying some weakness.

European markets were all lower on the week for a net loss of 0.7%. All indices are in uptrends.

The Commodity equity group were mostly higher for a net gain of 0.2%. All in uptrends.

The DJ World index was flat on the week and remains in an uptrend.

COMMODITIES

Bonds lost 0.1% on the week. It still looks like Bond rates are trying to confirm an uptrend.

Crude declined 0.3% on the week and remains in an uptrend.

Gold reversed last week's decline and gained 2.3%. Resumption of its uptrend underway. Still targeting a minimum of between $1389 and $1411 for this uptrend.

The USD lost 0.6% on the week. We had another postive divergence recently that has done nothing but provide a short term rally. Still downtrending.

NEXT WEEK

Busy, busy week ahead. On monday Personal income/spending and the PCE prices at 8:30, then ISM manufacturing and Construction spending at 10:00. Tuesday is election day and the start of the FOMC meeting. On wednesday we have the ADP index, ISM services, Factory orders, Auto sales, and the FED's FOMC statement. Thursday, weekly Jobless claims, and Q3 Productivity. On friday, the monthly Payrolls report, the Unemployment rate, Pending home sales and Consumer credit. The FED does not have anything else currently scheduled. Best to your weekend and week!

CHARTS: http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID1606987

Year 2010 expectations within Presidential Cycle detailed by Mike Burk; Cycles Review Part XIV; and 2010 forecast by Chart of the Day

The Presidential Cycle is a 4-year cycle study based on the 4-year terms of the U.S. president. It's gained some respect in investment circles to the extent that certain times within it can be shown to have a statistically higher probability of gain or loss. Now - I'd like to caution that we don't want to set our portfolios based on it, especially not in terms of going long or short month by month simply by these averaged results. But the 2nd year of the cycle, which 2010 will be, does have correlations to significant market lows at some point during this year. Significant such as, dropping eventually into a low much below where the year starts out; before making up the loss in the last few months of that year. I'm going to be more careful in 2010 because, for example, Terry Laundry with his T Theory is showing technical reasons that the market may have high points in May and/or August (as I understand his T Theory at least through last week). And generally, based on Elliott Wave and other analyses, we're going to remain on guard for a high in January that may point to a low in March that will dictate whether any subsequent bounce has much strength. While I'm not making my own full forecast for 2010 yet, I'm going with a high in January, weakness into March, and then we'll see how high it can get into May or August. But now, let's get informed on this Presidential Cycle too:

Mike Burk has devoted a collection of webpages to his detailed analysis of the 4-year Presidential Cycle, at http://alphaim.net/research/Pres_Cycle/index.html.

Here are his opening paragraphs:

The Presidential Cycle

Copyright 2009 Mike Burk & Alpha Investment Management

The Presidential Cycle is made up of 4 years beginning with the year the president is inaugrated. The material presented here is structured to help to identify some of the characteristics and/or dynamics of that 4 year cycle in the stock market.
....
It is interesting that the MDD [maximum draw-down, meaning biggest loss] has occurred during the 2nd year of the cycle all but four times since 1933. Two of the four occurrences were during the Eisenhower administration and a 3rd during the 2nd year of the Reagan administration when the crash of 1987 (the 3rd year of his 2nd term) exceeded all declines in 1986. The fourth, in 2008, during the 4th year of the second George W. Bush term was the first time the MDD occurred on the 4th year since the Hoover administration in 1932.

Anyone having any interest in the statistical details of the Presidential Cycle by year, month, equity index, etc., should visit these webpages of his; and should also review this weekend's Technical Market Report by him, at Safe Haven, which is included among the links for this weekend's reading list being posted here on Sunday.

A visual depiction of the averaged Presidential cycle is also charted out by Chart of the Day at http://www.chartoftheday.com/20091223.htm?T - as shown and quoted below. First: One thing interesting about this is that the depiction is a little reminiscent of Manfred Zimmel's free public version of the Bradley siderograph model, at least for the concept of going up into March and then dropping off. But we know the Bradley dates are just turning dates - they can be highs OR lows. And Zimmel's depiction of the Bradley shows March as higher than May ... so I'm only trying to say, it's interesting there's a rough similarity, but it breaks down when you look close. (Another reason to look at the Bradley siderograph as providing turning dates only; maybe the actual will be like Zimmel's free public version turned upside down.). Just as we don't want to assume that 2010 will look exactly like the averaged Presidential Cycle, either. So - back to the Presidential cycle - below is the quote abd chart from Chart of the Day:

CHART OF THE DAY - December 23, 2009
Today's chart illustrates how the stock market has performed during the average mid-term election year. Since 1950, the first nine months of the average mid-term election year has tended to be flat/choppy. That choppiness was then followed by a year-end rally. One theory to support this behavior is that the party in power will make difficult economic decisions in the early years of a presidential cycle and then do everything within its power to stimulate the economy during the latter years in order to increase the odds of re-election.

Quote of the Day
"Never try to walk across a river just because it has an average depth of four feet." - Martin Friedman

Events of the Day
December 25, 2009 - Christmas Day
December 26, 2009 - Kwanzaa (1st day)
January 01, 2010 - New Year's Day - Rose Bowl - Sugar Bowl
January 03, 2010 - US Congress convenes
January 04, 2010 - Fiesta Bowl
January 05, 2010 - Orange Bowl

Chart of the Day is provided to subscribers without warranty of any kind and accepts no responsibility for its accuracy or for any consequences of its use. Journalists and bloggers may post the above free Chart of the Day on their website as long as the chart is unedited and full credit is given with a live link to Chart of the Day at http://www.chartoftheday.com.

So that's very interesting information provided by "Chart of the Day". One would expect some relationship between the general "4-year cycle" and the Presidential cycle. But the general 4-year cycle tends to analyze in terms of measuring trough low points, and then whether or not the market has respected the prior low by the time of the midpoint. There are many who believe that March 2009 was the 4-year cycle low. That's one reason why it will be important to see whether or not the market makes a lower low by March 2011.

A related point is that we'll need to see if 2010 brings a new all-time high in the Dow Industrials. Maybe that sounds strange to many readers. But Tony Caldaro has placed a bullish count on the Dow Transports. For that matter, if the Dow Industrials' "B" wave lasts through August and becomes an expanded flat "B" wave, then a higher high (than in October 2007) is theoretically possible. Strange, but possible. Either way, the "C" wave down afterward will be a steep downward move.

Much earlier in 2009, I posted a series of "Cycles Review" - so I'm adding this post as item fourteen (XIV) in that series. Anyone interested in the other types of cycles reviewed in that series, simply click on the "Cycles Review" label to see all posts in that topic. It's a fascinating round-up, including but not limited to the sunspot cycle (and yes, it's amazing how that correlates) and the Benner-Fibonacci which suggests a relative high peak sometime during 2010.

Cycles tell a story about this market rally (the more things change, the more they're the same); risky ETFs that may be okay; and other trading topics

UPDATE - Terry Laundry's update at his T Theory site includes a chart and audio comments about a "mystery T" - so don't forget to check it out.

Here's a look at a few other items on the web worth checking out, including a look at certain ETFs for trading, and market charts analysis. Cycles expert Tim Wood has written a basic explanation of how he uses cycles analysis, using the Dow Jones Industrial Average as an example with additional comments on how he sees that (bullish vs. bearish). It's in his Market Observation - Tim W. Wood 09.25.2009, at FinancialSense.com: Cycles and the Big Picture. I keep Tim's Cycles News & Views site in the list at right because his cycles work really is impressive. Here's a quote of Tim's introduction - then you can click on the link to read his full article with the charts he refers to:

I have recently received a few e-mails asking about cycles and their application to the market. So in today’s wrap up I will attempt to present a brief and very simplified explanation of how cycles can be used as a very powerful technical tool once they are understood. I will then apply this simplified cyclical concept to the market.

From a cyclical perspective, the trend is defined by the direction of the cycle of the next larger degree. Also, from a cyclical perspective we work in many different dimensions. In this overview I’ll keep it simple and we will only focus on 3 dimensions. The key is to isolate and study each cycle of each dimension so that the direction and expectation of these cycles can be known. The identification of these cycle lows is definitely outside of the scope of this brief overview as it would require extensive writing and study on your part to do this subject justice. All I want to do here is simply present the concept of using cycle highs and lows of various degrees to show you the concept of how we can work in the various dimensions to identify important turn points. I will apply this concept on a very elementary basis and without the aid of indicators or statistical timing bands.

The first dimension that I work in is the long-term. Please see the diagram below. The red trend lines are representative of the long-term cycle. The overall trend is obviously up when this cycle is advancing and is down when this cycle is declining. These lows are identified using timing bands that have been developed through historical norms, the price action of each cycle of smaller degree and the help of price oscillators that have been specifically timed and developed for each cycle. Once a long-term cycle low is identified and confirmed we then know that the trend is up. We can then use the declines into the lows of the cycles of smaller degree as buying opportunities.

Here's another article, this one's a little more immediately bearish than I'm feeling right now, but hey - if it's just a week or so here or there, it's pretty close anyway, and this one has a bunch of neat charts: Multi-Year Bear Market Appears Ready to Return -- Seeking Alpha, 9/26/09.

And a good article about certain ETFs including FAS, FAZ, DTO, UNG, VXX/VXV, and some others: Defending the 'Most Dangerous ETFs': A Response to Don Dion -- Seeking Alpha (I think it's dated 9/25/09).

And check out the posts at our UBTNB3 blog, including Brian's (kalkgrun) chart showing LIBOR sparking up (link at right side of the page).

ADDED: And this weekend's sentiment and technical review from Todd Salamone and Rocky White at schaeffersresearch: Monday Morning Outlook: Despite Long-Term Uptrend, Bearish Sentiment Prevail, 9/26/09.

Cycles review, Part XIII: Fibonacci and Benner-Fibonacci cycles

The markets may be ready for a pause or pullback, according to a variety of indicators. But what happens after that - does it turn into a dive to new lows? or just a pause before the bull dons horns again and rallies higher (even if only a cyclical bull within a secular bear market)? Well, there's no guarantee that the market goes higher after a pullback. But there are some methods that suggest it - so let's take another look at concepts that do: the Fibonacci and Benner-Fibonacci cycles.

There are ideas of using Fibonacci for projecting cycles in the markets, as shown in the book by Frost & Prechter, Elliott Wave Principle (primarily at pages 147-150), which the authors then folded in with Samuel T. Benner's theory to create a Benner-Fibonacci cycle. Previously I reviewed this as a variant of the Decennial cycle, when I posted Cycles review, Part X: The Decennial Cycle here (May 23, 2009) under the "Cycles Review" label. As I posted earlier today, my interest in this was piqued as my eye fell on it last night and in pondering the possibilities of the rally extending for a complete 16-17 months from March, into 2010. I don't believe that this is "written in concrete" as a sure thing. But if the levels we're now testing in equities do not form a top that sends the markets back to new lows (such as 600 or below in the S&P 500 (SPX)) - which we may know if we see the market get support above 890 in the SPX on a pullback - then we need to consider these factors as part of the mix.

Actually, if you look at the Decennial cycle chart in that prior post, you'll see another basis to think that the rally may extend and then we see some level of a top in 2010 with weakness following that into 2012. But, that's another point (and sorry, these don't conveniently line up!). Below are the original Benner cycle and the modified Benner-Fibonacci cycle charts, along with the information about them from that prior post. Then, I've added some quoted material from the Elliott Wave Principle book about these, and then at the bottom are the extension dates that I calculated using the modified Benner-Fibonacci cycle for future projections:

There was a fellow called Benner who apparently went broke due to a hog cholera** outbreak (and probably other reasons) during the 19th century, who upon retirement studied markets and published a cyclic pattern in 1875. Then, A.J. Frost (co-author with Bob Prechter of The Elliott Wave Principle) elaborated on Benner's cycle using Fibonacci. Benner's 9-year cycle is below, followed by Frost's Fibonacci-based elaboration of it:

Now I'll quote in some of the information about the Benner and Benner-Fibonacci cycles from pages 150-151 of the Elliott Wave Principle (EWP) book by Frost & Prechter:

Samuel T. Benner was an ironworks manufacturer until the post Civil War panic of 1873 ruined him financially. ... In 1875, Benner wrote a book entitled Business Prophecies of the Future Ups and Downs in Prices. ... Benner's forecasts proved remarkably accurate for many years, and ... [e]ven today, Benner's charts are of interest to students of cycles and are occasionally seen in print, sometimes without due credit to the originator.

Benner noted that the highs of business tend to follow a repeating 8-9-10 yearly pattern. ... Benner noted two series of time sequences indicating that recessions (bad times) and depressions (panics) tend to alternate ... Although he applied a 20-18-16 series to recessions, or "bad times," less serious stock market lows seem rather to follow the same 16-18-20 pattern as do major panic lows. By applying the 16-18-20 series to the alternating stock market lows, we get an accurate fit, as the Benner-Fibonacci Cycle Chart (Figure 4-18), first published in the 1967 supplement to the Bank Credit Analyst, graphically illustrates.

That Benner-Fibonacci Cycle Chart is the second chart image in my prior post quote, above - the one that has the footnote saying "Peaks: 8-9-10 repeat. Toughs: 16-18-20, repeat. Major Troughs: 16-18-20, repeat." Here are the date extensions I calculated using the Benner-Fibonacci cycle -

Peaks after 1983:
1991, 2000, 2010, 2018, 2027, 2037

Intermediate lows after 1975:
1995, 2011, 2029, 2049, 2065

Panic lows after 1987:
2003, 2021, 2041, 2057

COMMENT: It's very interesting. And yet, it certainly didn't give the best guidance for big market turns. For example, 1983 was a nice peak, but if you shorted from the high that year, you would have been really hurting into the peak of 1987! So, 1987 was a peak AND a panic low! (Almost makes me wonder if one should try to re-set the cycle "clock" from that year?!)

Note - it's also possible to use Fibonacci time to project cycle turns, as I mentioned. Right now, all I can do is point that out, and readers may want to consult those pages in the EWP book for more on that. The dicey thing right now would be selecting which Fibonacci times to apply. It's pretty obvious that significant starting points would be 1974, 1982, 1987, 2000, and 2007. The discretion starts to come in when deciding which numbers to apply next. Here are some examples we can already draw:

1987 + 13 = 2000
2000 + 3 = 2003
2000 + 5 = 2005 (hmmm?)
2000 + 8 = 2008 (important intermediate low AND high points)
2003 + 5 = 2008 (ditto)
1987 + 21 = 2008 (ditto again!)

2000 + 13 = 2013
2003 + 13 = 2016

2008 + 3 = 2011
2008 + 5 = 2013
2008 + 8 = 2016

But remember, these dates immediately above are just some Fibonacci numbers tossed together and not the result of any serious analysis of what's likely for cycle tops or bottoms. Perhaps in a later post we'll be able to show something more seriously looking at that. For now, I'd consider these dates as something to consider alongside other cycles, and/or Elliott Wave, analysis projections.
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** PS - Manfred Zimmel's recent newsletter remark about the significant of a man being killed during this year's July (2009) running of the bulls at Pamplona, has really got me thinking about the idea of the "hog cholera" and this year's "swine flu" - both deadly to pigs. You know the old saying - in the markets, bulls make money, bears make money, but pigs get slaughtered. There really may be a lesson here, if it suggests that the "piggish" time of wild market peaks is over - and maybe we're going to be done with deep troughs for a while too? Pigs feed at troughs too ... maybe the markets will move - perhaps well! - within the 2007 peak level and the 2009 trough level for a while ...? Then again, maybe it means that traders' ability to "buy the dips" isn't so available in the current environment either? (or alternatively, maybe it means that the pigs will rule for a greedy rally to come?!) Nothing serious I'm putting forward with this, just "food" for thought!

Weekend reading to prepare for the trading week(s) ahead - T Theory, VIX, Benner-Fibonacci cycle, and SPX overbought - or not?

Terry Laundry is updating his T Theory work at his T Theory website - today (so far), he's showing:

Update for Sunday August 2 2009 (to be completed by afternoon)
Today's Topics include;
1. Discussion of the small black T in the AD Line chart that calls for a small, short correction next week.
2. A review of my companies July 31 2009 report and introduction to the concept of "benchmarking".
See the daily Indicator PDF chart below then listen to the audio commentary that follows:
Short Range Indication Chart Download SRT20090731
Then read my one page report to clients that begins to talk about strategies and other concepts to maximize the longer term A-D Line Ts rate of return for investments and the Audio Commentary that follows.
ASIC Report Download 2009.07 Report.web

Here is what Terry's new T Theory chart looks like at that link he provides - do remember to go there and keep up with his audio comments on what this means and how to intepret (and how to use it):

Todd Salamone and Rocky White have once again prepared good analyses that I recommend my readers take a look at, in Schaeffer's Research Monday Morning Outlook: After a Blisteringly Hot July, 1,000 Now Looms on SPX. The Schaeffer's summary states:

Although last week cooled off just a little bit, the Dow Jones Industrial Average (DJIA) finished its best month since 2002, soaring 8.6% in July. The major market indices traded flat for the better part of last week, only to rally sharply heading into the weekend on a General Electric Company (GE) upgrade and stronger-than-expected economic data. Looking ahead to next week, Todd Salamone, Senior Vice President of Research, zeroes in on resistance at the 1,000 level for the S&P 500 Index (SPX), as well as the Russell 2000 Index's (RUT) 80-week moving average. Todd also checks in with the 10-day moving average for the buy (to open) call/put ratio on the International Securities Exchange (ISE). Then, Senior Quantitative Analyst Rocky White explains why conventional wisdom surrounding a recent "overbought" signal from the SPX's relative-strength index might be off the mark. We wrap up with a look at some key economic and earnings reports slated for release this week.

And don't miss this one - Bernie Schaeffer himself weighs in with Schaeffer On Charts: Beware 'Group Think' on Volatility VIX traders certain volatility is headed higher. In addition to some other great comments, he points out that when VIX option premiums were acting and pricing similarly before - in August 2008 - that was actually "too soon" compared with the SPX market playing out its October 2008 swoon. He suggests that currently, options traders buying SPX puts (and calls) at current "low" levels are actually overpaying relative to recent historical volatility.

(I may add some additional items to this weekend reading list later today - but these are definitely at the top of the list!)

Here's some information I've developed using the Benner-Fibonacci cycle, in the "for what it may be worth" category! I am aware that Terry Laundry is bullish into 2010. And I see that Raymond Merriman believes that the move up from March 2009 may extend so it isn't just a 5-month rally, but last for 16 months - almost the same time period as Terry Laundry states (17 months). With the Dow Industrials having poked their January highs, and remembering my promise to explore some of the more bullish possibilities, here's one aspect of that. From an Elliott Wave perspective, I think it would have to be a larger "B" wave (and not a 4th wave) because moving substantially higher wouldn't really fit the typical Fibonacci relationships for a 4th wave, and would also get past more trendlines to a point where it wouldn't look fitting for a 4th wave either.

The Benner-Fibonacci cycle is one of those which I covered a couple of months ago in my "Cycles Review" series (you can use that label to locate more about those cycles. Last night I browsed my copy of the Frost & Prechter book, "Elliott Wave Principle" - first, I verified that a 4th wave often retraces 38.2% of the 3rd wave (in practice I think we know it can sometimes do 50% of the 3rd wave). I think the SPX is near that, but much higher and it looks emphatically more like a "B" wave (and the QQQQ's of course have now retraced 50% of their entire move down, having tagged $39.82). Tony Caldaro has the same view that I do, that the drop from the 2007 peak is a three-wave move and not a 5-wave move (as EWI asserts). Couple that with these Fibonacci levels, and it's looking more like we may have a "B" wave in progress. That's how Tony has been labeling it all along, but he uses his own proprietary OEW methods, so partly I'm having to translate a bit using the EWP-book based EW that I know. Frankly, it's quite odd for me see see a 3-wave move that has the "C" wave so lengthy, but I think I can get past that if the market is willing to do so!

My eye fell on the Benner-Fibonacci cycle discussion in the EWP book (page 151 and Fig. 4-18) just when I opened it last night. So I returned to it and worked out the projections using its cycles for peaks, intermediate lows, and "panic" lows. It projected a panic low in 2003 - check. It projected an intermediate low before that, in 1995 (before the market really took off in the late 1990's). It would project the next intermediate low in 2011, and the next panic low in 2021 - so, will see!

The Benner-Fibonacci cycle projected a peak in 2000 - check. And the next peak in 2010 - so again, will see! Doesn't have to be a higher high, but would be an important high in this cycle. (The next one would be in 2018.) So perhaps the Benner-Fibonacci cycle helps to support the idea that the rally has further to run before finishing its work in 2010.

Dow Theory reminds us to stay bearish unless the Dow betters its January high (and now, the lower June high is resistance); also market cycles views

Here's a way to look at the basics of the equity market "big picture" now (especially with my charts at the bottom of this post). And, students of market cycles, take note: Financial Sense Newshour this weekend is featuring cycles, including having Tim Wood as the advisory technician during the first audio segment (and there's another cycles analyst featured during the second audio segment, Stephen J. Puetz, author of "The Unified Cycle Theory: How Cycles Dominate the Structure of the Universe and Influence Life on Earth" including electromagnetic influences) - at FinancialSense.com weekend audio. UPDATE - Schaeffer's Research has issued their Monday Morning Outlook: Traders Raising the Bar for Earnings, Economic News -SPX breaches one support level; others at risk, by Todd Salamone (7/12/09). As Schaeffer's summarizes this article:

The initial excitement about a potential second stimulus package evaporated when Wall Street realized that the need for such a package might mean that the U.S. economy is further away from a second-half rebound than originally thought. Confirming those fears, last week was riddled with shaky economic data, which helped to overshadow the emergence of a major Detroit automaker from bankruptcy protection. Looking ahead to next week, Todd Salamone, Senior Vice President of Research, examines support and resistance levels for the S&P 500 Index (SPX), as well as potential concerns on the sentiment front and the SPX's 20-day historical volatility. Then, Senior Quantitative Analyst Rocky White takes a closer look at Bollinger Bands, the SPX's current 80-day streak of trading between them, and what an eventual breakout in one direction or another could mean for the market. We wrap up with a look at some key economic and earnings reports slated for release this week. Continue reading...

Tim Wood featured at FinancialSense is the cycles master who also applies Dow Theory, McClellan Oscillator and other technical indicators in his coverage of stock indices, gold, oil, bonds and the dollar at Cycles News and Views (link in the other sites of interest at the right side of the page here). He occasionally posts public articles at Financial Sense (he's the one I mention because I consider his work consistently reliable), and this audio feature at FinancialSense.com weekend audio is another way for non-subscribers to get a glimpse into - listen to - what he is seeing.

Now Bud, this one is for you! You challenged me to make one clear-stated explanation why we should be bearish. One of the plain and simple points that I will borrow from Tim Wood is, as Tim repeatedly states to explain being bearish, is also based on classic, good old-fashioned Dow Theory. Specifically, that the Dow Jones Industrial Average (the Dow) remains in bearish mode so long as it remains under its January high! Despite all the conflicting information out there, this fact is simple, clear and important - the Dow has never yet pushed above the highest point it reached in January, half a year ago. In fact, that is true not only for the standard Dow (Dow Industrials), but even for the Dow transports.

Notice that the Dow high last month did not go above the Dow January high. And now, the Dow even has to go above its June high to give some hope of being bullish again! So keep your eye on that - the Dow must be viewed as a "sell" unless and until:
1. if it can get above last month (June) high
2. AND then, above the high of 6 months ago, back in January.

The basic rule is that bearish is lower lows and lower highs. After the high of January, the Dow plunged to a new low at about 6469. The only thing that can break the cycle of lower highs and lower lows, is a higher high - higher than January in the Dow. So unless and until that happens, it remains bearish and another new low remains possible.

It is possible to make the analysis more complicated. But that really is not necessary, and can be too distracting. Actions speak louder than words. So we will let the Dow prove to us whether - or not - it can make these higher highs. And meantime we will remain bearish (especially if the Dow loses the 8,000 level, and then doesn't get back over 9,000).

Here are my two charts - the first a daily chart to illustrate the basic point of Dow Theory; the next a monthly chart with 20 years of the Dow to show graphically the tenuous position it is in (click on an image to see it larger/more clearly):

Lining up some reading for the list going into this weekend's markets review

Here are some articles and posts to ponder, going into weekend review of how the markets are faring and where they're going:

VIX at Seasonal Cycle Low (Bill Luby at his VIX and More, 6/19/09) - this one's so interesting, I should put something together about it for my "Cycles Review" as Bill has charted out a distinct seasonal cycle for the VIX.

VXX:VXZ Ratio (also by Bill Luby at his VIX and More, 6/17/09) - looks at volatility-tracking ETFs and the short-term vs. longer-term ones.

Linear Gann Emblems of Current Move (Andy Askey at his PTV-Investing Blog, 6/19/09) - prospects for the movement in S&P 500 and Nasdaq

Insiders and Insiders - Part II (Allan at AllAllan's blogspot, 6/18/09) - looking at patterns of insider buying and selling activity in the technology and financials sectors

30 Year Treasury Long Term Chart (also by Andy Askey at his PTV-Investing Blog, 6/19/09) - interesting analysis on the big-picture situation for US Treasury bonds

A Pause in Treasury Yields (CondorOptions.com, 6/18/09)

22 Banks Downgraded By S&P (Zero Hedge, 6/17/09)

Mortgage Lift Off: Checkmate Bernanke (Financial Ninja 6/18/09)

*UPDATE: Asymmetric information and corporate governance in bank bailouts - Submitted by Edward Harrison of Credit Writedowns, posted at Naked Capitalism.

Financials: Charts Say "Decisions Time" Update2 (Financial Ninja 6/18/09)

Five Things: What Really Caused the Debt Crisis (Kevin Depew at Minyanville News & Views/ (6/17/09) - Kevin always provides a fun read! Includes a very interesting tidbit about gold ... as well as DeMark Indicator update information about silver.

Cycles review, Part XII: Solar (Sunspot) cycle (eeriely similar to the popular Dow/gold chart!) - or, if it's in our stars, why not the closest one?!

NASA has published an update to the Solar (sunspot) Cycle that almost makes me wonder - why work away at all this chart analysis, if the answers to equities and other markets are just in our stars?! Our nearest star, the sun, to be specific! Look at the data and charts below - you'll be impressed with the eye-opening correlations. NASA's article with the Solar Cycle update is at http://science.nasa.gov/headlines/y2009/29may_noaaprediction.htm. This is so interesting that it definitely warrants its own place as Part XII of my ongoing "Cycles review" here. Let's start with a look at some of what NASA is saying:

New Solar Cycle Prediction - May 29, 2009
An international panel of experts led by NOAA and sponsored by NASA has released a new prediction for the next solar cycle. Solar Cycle 24 will peak, they say, in May 2013 with a below-average number of sunspots. ""If our prediction is correct, Solar Cycle 24 will have a peak sunspot number of 90, the lowest of any cycle since 1928 when Solar Cycle 16 peaked at 78," says panel chairman Doug Biesecker of the NOAA Space Weather Prediction Center."

[Below is a view of NASA's page at http://science.nasa.gov/headlines/y2009/29may_noaaprediction.htm (with the above quote encircled)]

(Upper right: A solar flare observed in Dec. 2006 by NOAA's GOES-13 satellite. (Click on any image to see it larger))

More from the NASA article:
"Even a below-average cycle is capable of producing severe space weather," points out Biesecker. "The great geomagnetic storm of 1859, for instance, occurred during a solar cycle of about the same size we’re predicting for 2013."
....
Above: This plot of sunspot numbers shows the measured peak of the last solar cycle in blue and the predicted peak of the next solar cycle in red. Credit: NOAA/Space Weather Prediction Center.

The latest forecast revises an earlier prediction issued in 2007. At that time, a sharply divided panel believed solar minimum would come in March 2008 followed by either a strong solar maximum in 2011 or a weak solar maximum in 2012. Competing models gave different answers, and researchers were eager for the sun to reveal which was correct.

"It turns out that none of our models were totally correct," says Dean Pesnell of the Goddard Space Flight Center, NASA's lead representative on the panel. "The sun is behaving in an unexpected and very interesting way."

Researchers have known about the solar cycle since the mid-1800s. Graphs of sunspot numbers resemble a roller coaster, going up and down with an approximately 11-year period. At first glance, it looks like a regular pattern, but predicting the peaks and valleys has proven troublesome. Cycles vary in length from about 9 to 14 years. Some peaks are high, others low. The valleys are usually brief, lasting only a couple of years, but sometimes they stretch out much longer. In the 17th century the sun plunged into a 70-year period of spotlessness known as the Maunder Minimum that still baffles scientists.

Above: Yearly-averaged sunspot numbers from 1610 to 2008. Researchers believe upcoming Solar Cycle 24 will be similar to the cycle that peaked in 1928, marked by a red arrow. Credit: NASA/MSFC

Right now, the solar cycle is in a valley--the deepest of the past century. In 2008 and 2009, the sun set Space Age records for low sunspot counts, weak solar wind, and low solar irradiance. The sun has gone more than two years without a significant solar flare.

"In our professional careers, we've never seen anything quite like it," says Pesnell. "Solar minimum has lasted far beyond the date we predicted in 2007."

In recent months, however, the sun has begun to show timorous signs of life. Small sunspots and "proto-sunspots" are popping up with increasing frequency. Enormous currents of plasma on the sun’s surface ("zonal flows") are gaining strength and slowly drifting toward the sun’s equator. Radio astronomers have detected a tiny but significant uptick in solar radio emissions. All these things are precursors of an awakening Solar Cycle 24 and form the basis for the panel's new, almost unanimous forecast.

According to the forecast, the sun should remain generally calm for at least another year. From a research point of view, that's good news because solar minimum has proven to be more interesting than anyone imagined. ...

Meanwhile, the sun pays little heed to human committees. There could be more surprises, panelists acknowledge, and more revisions to the forecast.

"Go ahead and mark your calendar for May 2013," says Pesnell. "But use a pencil."

I do recommend readers check out the full article at NASA's webpage, at the link above. For purposes of this particular post, I want to zero in on their chart showing sunspot activity since the year 2000. (At some point for longer-term studies of the market's long-wave cycles over the centuries, we might want to refer back to that lower-term chart showing the Maunder Minimum.)

Here's where it gets really interesting. After you see the sunspot cycle pattern in NASA's chart above, compare that with a chart of the Dow Jones Industrial Average. But not the one you're used to seeing that bottoms in 2002 and rises into 2007. I'm thinking of the inflation-adjusted version that screens out the effects of the greatly devalued dollar (which has 'conveniently' masked the great drop in asset values the U.S. has experienced over the past decade). Below is the Dow/gold ratio chart circulated publicly from time to time by "Chart of the Day," most recently several weeks ago which I posted along with their commentary at If the Dow-Gold ratio bounced up higher, will it be from the Dow rising or gold falling (or both)? Checking gold in 3 time frames (5/9/09) - this is the chart most commonly considered to show the inflation-adjusted Dow Jones Industrial Average. Below is just that portion of the post, with their chart and commentary:

Chart of the Day
"Today's chart [5/9/09] presents the Dow divided by the price of one ounce of gold. This results in what is referred to as the Dow / gold ratio or the cost of the Dow in ounces of gold. For example, it currently takes 9.2 ounces of gold to “buy the Dow.” This is considerably less that the 44.8 ounces it took back in 1999. When priced in gold, the Dow is down 79% from its 1999 peak and the scale of the current two-month rally has not distinguished it from the many bear market rallies that have occurred over the past decade."

"Webmasters, journalists, and bloggers may post an occasional free Chart of the Day on their website as long as the chart is unedited and full credit is given with a live link to Chart of the Day at http://www.chartoftheday.com."

It would be fascinating to really track out the correlations (time doesn't permit me to do so). I understand that some others may have done that but I don't know that there's a public version to post or quote. Still, any student of the markets who knows major high and low points of the past few hundred years cannot help but find the NASA information intriguing. And even a casual review of "Chart of the Day"'s Dow/gold chart shows a startling similarity to the sunspot cycle since the year 2000.

Another area to consider would be the correlations to the ancient calendar systems that incorporated solar, lunar and planetary cycles with agricultural, commodity and market cycles. One example being of course the traditional Chinese calendar with its 10 "heavenly stems," 12 "terrestrial branches," and the pairing of these which yield confluences of 60-day patterns and 60-year cycles. Something I've referenced previously in this cycles review series of posts, and also at my Tao of Trading site.

Many equities analysts are projecting that the equities markets move into bear-market lows in the time frame around 2011-2015, and I don't reject those ideas out-of-hand. But my own work is showing that there remains a possibility that the equities markets can make a significant low, either later this year (perhaps September or later in the fall) or about mid-year in 2010. To be followed by a much more substantial rally, even with a theoretical new high (but don't get excited - can be a bear-market rally but much better than the one we've seen so far). Therefore, it's only natural that I find it personally interesting to see NASA's projected sunspot cycle dropping into a low perhaps this year, with a good bounce into 2013.

Below are my hypothesis or working analysis big-picture charts of the Dow Jones Industrial Average and the S&P 500 indices. If you look at this post, Long-term channel (5/22/09) that I posted at my UBTNB3 blogspot (link to that always at right), you'll also see a long-term price channel chart as located at Insights from Jeremy Siegel: 3 Reasons Why The Dow Will Hit 10,000 in 2009 (InvestmentU.com, 5/18/09). To accomplish the price targets I've mentioned in my long-term charts below, price would fall somewhat lower under Jeremy Siegel's long-term channel trendline that it already did. But when you look at his chart, you see that price already did poke under it during the lows of the 1970's/1980's - which can set up an outside and lower but still parallel trendline providing support for a poke lower presently. For that matter, breaking under but retaining a channel trendline would be consistent with such Elliott Wave views as a large expanded flat that can set the stage for a fifth-wave diagonal; or, that corrects the movement up from 1932 or so. (Depending on which it is, Jeremy Siegel may end up being right that the Dow will hit higher levels that people don't expect - even higher levels than Dow 10,000 but not in 2009. Although it's also possible for a sharp rally to test up to that level, probably along with SPX 950/960, before new lows later this year or into mid-2010, so we'll stay alert.) But also note that the potential projections I've noted on the charts below, can remain within the long-term price channel as it's marked on a different version of the big-picture chart, which I posted at Big-pic alternatives-equities (5/16/09) at my Unbiased Trading - No Bull, No Bear, No Bias (tm) (UBTNB3) site.





For those particularly interested in tracking the gold market, and if you haven't been reading my posts tracking it (use the "Gold" label in the labels list at right), I've been continuing to track the bull vs. bear cases for gold in terms of chart and technical analysis. Recently, gold moved up quite well in dollar-denominated terms, but that's partly because of the dollar's drop, This rally is much more muted in other currencies (although it made a new all-time high in other currencies, when gold made the $1007.70 intermediate swing high that hasn't yet been bettered). Frankly the odds would normally favor gold cycling downward right now, but it has not violated chart support so I'm remaining open to the possibility it may actually rally higher. In any event, moving to $1008 (not to mention $1034) will be most significant from a chart basis. In both the dollar and in other currencies, gold's recent rally has not yet confirmed the idea of a large third wave higher. So even though I do have a price objective at $1192, don't get gold fever before it breaks above those key levels, because if it fails to do that and loses support then I've got lower price projections including to $550.

I've included the Solar Cycle in my "Cycles review" here because it's looking apparent to me that the Solar Cycle being tracked by NASA may have correlation to financial market activity, even though I'm not prepared to discuss reasons why. I know that there are others who track natural phenomena to financial markets - not just Raymond Merriman from the financial astrology point of view, but also those who show correlations with geomagnetic storms, and Chris Carolan with his "Solunar" model that correlates with solar and lunar cycles, and even Mike Korell's work at ChartsEdge with the daily maps based on VLF signals. I also know that Mike has done mathematical work examining those down to fractal measurements that may relate to "phi", and there are others working with such mathematical methods including Martin Armstrong and those involved with Gann analysis (such as Andy Askey at his PTV Investing blog). You can locate some background information on these using the labels list here, and of course by visiting the pertinent websites included in my list of "other sites of interest" at the right side of the page here.

Well this has been a time-consuming post on a pretty, sunny morning, so I offer this set of information for your consideration. And now I'm off to enjoy the sun in a more direct way! Hope you're enjoying your weekend; and I'll return later in the day with the forecast charts provided by ChartsEdge, as well as Andre Gratian's Turning Points weekend newsletter update.

Cycles review, Part XI: Economic Confidence Model - and what about the U.S. dollar?! with review from Martin Armstrong

Martin A. Armstrong developed the Economic Confidence Model, and he's been pointing out that it does not necessarily correlate to equity markets but rather to economic confidence. Which can be observed in various ways and will show up as highs or lows in different markets at different times. Personally, it seems to be it has a fairly good correlation to swing highs and lows in the volatility index (VIX), but he's pointed out correlations with the real estate market and apparently relates it to important level in other markets such as currencies, with the dollar. Below I'll present some new information from a "Market Outlook" newsletter Armstrong apparently wrote or published May 1, 2009 (available at http://www.scribd.com/mobile/documents/15095650) that addresses a number of economic issues, including reviews of various currencies. But first, below are depictions of his Economic Confidence Model:

Additional background information is included in prior posts (use the "Confidence Model-Armstrong" label in the labels list) and there's even a Wikipedia article about him (check Wikipedia under Martin Armstrong).

Armstrong's May 1 "Market Outlook" addresses currencies in particular, including correlations to dates projected by his model. Since the dollar hit a symmetry target low today, and there's a substantial question whether it will find support or not, let's take a look at what Armstrong's newsletter says about it (at pp. 14-15, including his dollar index chart, below).

"The Dollar World"

The major high in the dollar was actually reached in late 1932 during the Great Depression. Virtually all of Europe defaulted on its national debt, with the exception of Great Britain and Switzerland who entered into a moratorium suspending interest payments. This sent the US dollar to record highs on a flight to quality perspective. Of course the US politicians saw this as a threat to the economy and supported Protectionism. That response was akin to the arab blocking off the access to the Mediterranean that then thrust deep into the heart of Western Europe the end of trade and imposing a dark age where everything was lost right down to language.

The monetary cycle frequency tends to be 37.33 years and if we add this to 1932.8, we come to 1970.13. This is where there had existed a two-tier gold market - (1) official price for settlement between nations, and (2) the free market price on the London Metals Exchange. In 1970, this is the first time that gold actually fell below the official price of $35 on the free market. This was clearly a major high for the dollar just before the crash and burn that followed the next year when President Nixon closed the gold window and this began the floating exchange rate system. We add this and we come to 2007. This appears to have produced a cycle inversion insofar as instead of a high for the dollar, we have a major low. To the shock of most, the dollar then rallied from the first turning point on the Economic Confidence Model being 2008.225 (March 23rd, 2008). From there as we then approach the next minor turning point of April 19th, 2009, the dollar has declined marginally, but between the 1970 high, the next low for the dollar was in 1974, a rally into 1976, and the decline into 1980. Keeping the turning points in time, this projects the next big turning points to be 2011, 2013, and 2017.

The 2011 target lines up with the Economic Confidence Model as well so where we find these convergences, they tend to be the real important swings and turning points. The question that seems to be open, is shall this be a high or a low? Can we really see a rally for the dollar last that long into ideally June 13th, 2011?

The Monthly Chart provided for the ICE Dollar Index shows the low that was formed with the Economic Confidence Model 2008.225. I have provided the two main channels to watch. The First Broad Channel is constructed by taking the high on the major turning point in July 1998 just prior to the collapse of Long-Term Capital Management and tied to the 2008 low in March with the current Economic Confidence Model Wave. This broad channel is then formed by taking the parallel to the major high in 2002 that was also in line with the nadir of the last wave 2002.85.

This Broad Channel stands at 99 in April and scales downward to reach about 96 by the end of 2009. Another parallel is formed then by using the reaction high in December 2005. This is providing a keen monthly closing support level to watch for the y ear. The Index penetrated it in December, but it still held this support for the close. It appears that a monthly closing above about 91 will signal that the dollar is going to rise sharply and believe it or not, could actually exceed the high of 2002 going into 2011 as nuts as that may sound.

The only explanation for this ... would tend to suggest a sharp decline in the economic prospects within Europe and Russia. ...

Of course, the dollar historically rises in periods of sharp economic declines as long as tangible assets, debt, still tend to contract in value. The real estate market still does not appear bullish and the fact that J.P. Morgan and Goldman Sachs are trying so hard to depart from TARP, we may yet see another collapse in the Investment Banking system ...

The Second Channel is constructed from the low of the 1998 Long-Term Capital Management Crash connecting this to the high of the reaction rally into December 2005. Parallels are then taken from the low of 1995 where the yen made its major high, the low in January 2005, and then the bottom is the major low in 2008.

Looking at the Second Channel, we can see that the dollar has exceeded both these mid-range parallels and has been holding above them on a monthly closing basis. This outlines key support forming technically in the 81-82 range for the balance of the year.

Holding the 81 level on a monthly closing basis seems to be setting the stage for at least some consolidation right now. If we begin to see the dollar index close on the ICE below 79 on a monthly basis, then we may see a dollar decline into 2011. But for now, both economics and geopolitical factors may still favor the United States going into the months ahead.

That does not negate the potential for a sharp rise in gold. We may still see gold rise significantly as the only real viable option to the dollar.

=============
Here's my monthly chart of USD - the lines I drew aren't the same as Armstrong's, but I admit I was just taking some guesses at the time. I might apply Armstrong's to it:

Thinking about how Armstrong drew lines on the dollar's chart, and in light of his comment, I am thinking of a new trendline on my gold charts that would look like this:


Looking at it, it looks so natural that I'm embarrassed I didn't detect it before. Gold didn't break to new highs today, but the rise does look strong and there's no basis at this point to rule out the "rally to new highs" scenario. It won't be confirmed unless gold on this chart goes above 1008, so we'll have to continue keeping a close eye on it.

Cycles review, Part X: The Decennial Cycle

The Decennial Cycle is well-known, although I've discovered that there seem to be several versions of it claimed under different authorship! One was apparently published by Edgar Lawrence Smith in a book, "Tides in the Affairs of Men" and includes such statements as, the fifth year of each decade tends to exhibit the most latent fear in public sentiment and therefore the stock market tends to do well during the fifth year since the market responds favorably to investor fear. (Huh?) And his 10-year cycle bottoming at the end of the fourth year of each decade. Then, there's a 10-year cycle used by Samuel Kress, which would be proprietary to Mr. Kress. There's also a Decennial Cycle published as an exhibit in The Elliott Wave Principle book by Frost & Prechter. It's the one in which the U.S. equities market bottoms in a year ending in ‘2’ and then progressively rises to a peak in a year ending in a ‘6’ or ‘7’ and experiences a crisis and slump. The market then rises to another peak in a year ending in ‘9’ or ‘0’ ended year, followed by another market collapse. DogsoftheDow.com shows one of the charts depicting this (along with this note: "Point of Interest - One shouldn't put too much emphasis on this popular cycle as there isn't any particular underlying reason why the stock market's performance should be tied to any given year within a decade except, perhaps, as it relates to the presidential cycle.") as the Decade Cycle. Despite their assertion there "isn't any ... reason," you can see that the chart shows a definite pattern:


Below is a table documenting effects of the Decennial Cycle back to 1887 - this particular data set being quoted from an article at a cycles website of a fellow called David McMinn, at http://www.davidmcminn.com/pages/2007.htm (which I am not familiar with, but came across while research information on the Decennial Cycle for this post):

BEAR MARKETS IN 7 ENDED YEARS
7 Ended Yrs ....... DJIA High ........... DJIA Low ............ % Decline ....... Market
1887 .................... Dec 03, 1886 ........ Apr 02, 1888 ......... -20.1 ........... Bear
1897 ................... Sept 10, 1897 ........ Mar 25, 1898 ......... -24.6 .......... Bear
1907 ................... Jan 19, 1906 .......... Nov 15, 1907 ........ -48.5 ........... Bear
1917 .................... Nov 21, 1916 ......... Dec 19, 1917 ........ -40.1 ............ Bear
1927 .................... Oct 03, 1927 ......... Oct 22, 1927 ........ -10.2 ............ Correction
1937 .................... Mar 10, 1937 ........ Mar 31, 1938 ....... -49.1 ............ Bear
1947 .................... May 29, 1946 ........ Jun 13, 1949 ........ -24.0 ........... Bear
1957 .................... Apr 06, 1956 ......... Oct 22, 1957 ........ -19.4 ............ Correction
1967 .................... Feb 09, 1966 ......... Oct 07, 1966 ........ -25.2 ........... Bear
1977 .................... Sep 21, 1976 .......... Feb 28, 1978 ........ -26.9 ........... Bear
1987 ................... Aug 25, 1987 ......... Dec 04, 1987(*) .... -35.1 ........... Bear
1997 ................... Aug 06, 1997 .......... Nov 12, 1997(*) ... -13.2 ........... Correction
2007 ................... Oct 09, 2007 ......... CONTINUING -? ..................... BEAR

(*) The actual low occurred on the day of the panic, but the date given was the low after this event.
Note: Bear market fall means less than 20% drop; Correction market fall means more than 10%and less than 20% drop.

For more information: If the peak occurred in a year ending in ‘7’ then it was also most likely to happen in the 2.1-month time frame beginning August 6 (1897, 1927, 1987, 1997 & 2007)! The exception was in 1937 with a high on March 10. Most recently in 2007, the DJIA record high happened on October 9, so that was quite consistent with these Decennial Cycle probabilities.

One statement about a Decennial Cycle can be found by Manfred Zimmel at http://www.amanita.at/Interessantes/Artikel/detail.php?id=1584, as follows:
"decennial cycle (10 years): amplitude around 35%The decennial cycle is the best-known cycle. As a matter of fact there are huge differences in the average performance of a year: ranging from almost +30% in a '5'-year (such as 2005, 1995) to a loss of more than -5% in '0'-years (such as 2000), which translates into an amplitude of some 35% (chart from Alan Newman 1881-2007, N=127)." (And, okay Yelnick fans, he discusses decennial cycles at http://yelnick.typepad.com/yelnick/2005/05/the_great_wave_.html.)

Of course, there's also a Decennial Cycle attributed to W. D. Gann, although an article at SchoolofGann.com asserts that it's based on astrology but is not an actual 10-year cycle, it's one-half of Gann's 20-year cycle which is the conjunction of Jupiter (12-year cycle) and Saturn (30-year cycle) and is actually just under 20 years in length. Deemed a "synodic cycle" that tells how much time it takes for Jupiter and Saturn to appear at the same longitude in the sky.

There was a fellow called Benner who apparently went broke due to a hog cholera outbreak (and probably other reasons) during the 19th century, who upon retirement studied markets and published a cyclic pattern in 1875. Then, A.J. Frost (co-author with Bob Prechter of The Elliott Wave Principle) elaborated on Benner's cycle using Fibonacci. Benner's 9-year cycle is below, followed by Frost's Fibonacci-based elaboration of it:


There is a group called the Foundation for the Study of Cycles which has a website. However, I haven't been able to see any free, publicly available information from them on cycles, and am reluctant to spend money for their publications outright. Maybe sometime in the future, will see. If any readers are really interesting in studying the Decennial and other cycles, then they might want to include that Foundation in their scope of research.

Before I finish this post, I must refer to something else I stumbled across whilst researching the decennial cycles. There's a Wikipedia article about one Johann von Lamont (December 13, 1805 – August 6, 1879) a Scottish-German astronomer and physicist. The article at http://en.wikipedia.org/wiki/Johann_von_Lamont includes this information: "His most important work was on the magnetis of the Earth. He performed magnetic surveys in Bavaria and northern Germany, France, Spain, and Denmark. He discovered a magnetic decennial period (ten-year cycle) and the electric current in the Earth closing the electric "circuit" creating the magnetic field in 1850. This roughly matched the eleven-year sunspot cycle discovered by Heinrich Schwabe." In fact, I remember seeing the sunspot cycle somewhere recently ... in a certain Elliottician publication correlating to U.S. financial markets .... although I'm not sure I agree with their EW counts but I can agree there's an obvious pattern in sunspots that seems to have some correlation with the markets ..... So .... no apparent cycles in nature, affecting the world? Hmmmmmmm!

Cycles review, Part IX: Cycles aspects of Gann angles and the "Square of 9" for price and time

The methods named after their founder, W. D. Gann, use angles and "fans" to project not only price but also time, and therefore can be said to incorporate or involve cycles. It also includes calculations involving the Square of Nine, so I'm associating it to this Part IX in my review of cycles methods! Gann wrote a publication about his angles method, The Basis of My Forecasting Method, in 1935. I'm glad to see that Andy Askey has made a couple of recent posts at his PTV-Investing Blog, which we can reference to illustrate some information on Gann analysis. One is Linear Square of Nine on SP500 Index (4/1/09). Another is Low Volume Thrust - Need Continuation Follow Through (5/18/09) which includes Andy's comment, "The SP500 index (SPX) met the 218 day cycle with buying - but not with enthusiasm." Below is one of his charts that accompanies that post, and you can see that this particular chart takes an extra step to really illustrate how the angles can be used with cyclic elements. (It reminds me to an extent how I've built up my trendlines on the VIX chart - not specifically attempting Gann analysis but there may be similarities.) Another post by Andy there is Crude Oil Bounce Is Weak In Long Term (5/19/09). You'll want to read his complete posts to learn more about this, of course. But for a quick look at how he puts Gann analysis into action, here's a quote from the post about oil:

How high can we reasonably expect the current bounce to move? The
quick and simple answer is the 50% price retrace level near $90. The
probability of a complete retrace in the short term is very low as the bounce is
less that half as strong as the move down. But a move to a 50% retrace at
100% time cycle this summer is not out of the question. In the long term
this bounce is tepid and shows few believe the 2008 high was anything more than
a blow off of the long term trend. Still a move from 60-90 is a 50% move
in price and and a chance for traders to make money in this sector.

The "Square of 9" Andy describes briefly: "Market prices tend to move according to a square root algorithm. This occurs over and over again and can be found on the SP500 Index (SPX) without trying very hard. Gann did not have access to an electronic calculator, spreadsheets, computers, or anything we take for granted today. In his day, the square of 9 was an amazing tool for finding natural price resistance and time cycles from a specific point. It continues to work today." Andy shows an example at this post, Gann Wheel or Emblem from March 6th Low (4/30/09)(and his graphic there looks neat so I've included it, at right - read his post there for more information for using it). In Andy's post about the Square of Nine on the long-term S&P 500 chart (referenced with link in the opening paragraph above), here are Andy's comments on the big picture in the S&P 500 index:

The price action from 2002 has consistently followed the square root
progression. Price topped at six complete cycles of 360 degrees in October
2007. The March low came very close to 360 degrees below the 2002
low. Maybe price has unfinished business… maybe not. Near 880 is 720
degrees off the low and a place to watch for this leg to stall out.

Andy provides additional information about the Square of Nine in this post at his site: Gann Square of 9 (12/23/08). There's actually some information on Gann and his angles, at http://en.wikipedia.org/wiki/Gann_angles too. Below are some of Andy's charts that go along with the posts referenced above. First, his big-picture view of the S&P 500 in the Square of Nine post; next, one from his May 18 post about the possibility of the SPX doing a 50% retrace on a pullback; and at bottom is his chart associated with his post about oil: