Why A Late Summer Rally?

During the course of the last few weeks, I have postulated that the low of March 9 was the beginning of a new 10 month cycle. This required a phase shift as the low in November 08 should have coincided with a new 10 month cycle. As I pointed out, Tom McClellan has shown conclusively that such a phase shift often does occur every few years usually in conjunction with a significant long term low, so this is a legitimate possibility.

The 10 month cycle generally takes the shape of a big M with the first leg up lasting 12 to 18 weeks, the small leg down lasting 4 to 10 weeks, the small leg up lasting 4 to 10 weeks, and the final leg down lasting 12 to 18 weeks for a total of 44 weeks. Of course, this is a general pattern and after major bottoms or tops, the form may be suppressed due to the effects of the larger cyclical forces.

It appears that the first leg up in the Qs lasted 13 weeks from March 9 to June 11. We might normally expect an extended correction of 4 to 10 weeks at this point. However, as I have also postulated that the March 9 bottom was also the "4 year" cycle low, we can expect that the correction would be muted, i.e it may only last a couple of weeks as occurred in 2003. If it does extend to 4 weeks, the bottom would likely occur around July 15+-.

Thereafter, we can expect another substantial rally which either will or will not make new highs. Most likely it will make new highs, I believe.

As Tom McClellan has also shown, when the second high of a 10 month cycle makes a higher high, it generally means that at least the first high of the next 10 month cycle will make a higher high. Thus it would follow that we could expect another high for this cyclical rally in April to June of next year if we see a higher high in July/August of this year.

It is at that point that we will see the resumption of the bear market. In a few weeks, I hope to present a small paper on my projections for the rest of the bear market. There seem to be few people expecting the rally to continue into 2010 who are also secular bears. I am putting forth this viewpoint in the hopes that it will aid traders in navigating this difficult period and perhaps prevent a few overzealous bears from trying to go for broke on the idea that the bear market is set to resume in earnest in the near future.