20 Month Cycle

I have discussed at length in the past that what is usually called the 9 month cycle is actually 10 months on average and is half of a larger 2o month cycle which varies in length from 18 months to 22 months. The span from the 3/6/09 low to the 2/5/10 low is within one day of being 11 months, or half of the larger 22 month cycle. If we project an equivalent time length for the second half of the cycle, then the projected bottom date is 1/6/11.

11 months is just shy of 48 weeks and we have most likely completed a smaller 1/4 cycle of the 11 month cycle of 13 (12 +1) weeks at yesterday's low, which is a mirror of the 11/2/09 low that occured 13 weeks before 2/5/10. It would be tempting to continue projecting forward 12 weeks at a time, but looking backward into 2009, we see that the next previous major low occured on 7/8/09, which is 17 weeks previous to the 11/2/09 low . Mirroring that low forward projects the next major low to occur on 9/2/10+/-. Assuming some right translation of the cycle high, we can expect the high of the cyclical bull market rally to occur sometime in the time frame of 7/22/10 to 8/5/10. It is interesting to note that a number of significant turning points have occured around the third week of July including a penultimate top in 7/16/07.

I had previously indicated that a 20 week low was due in late June. I believe that is incorrect as the above analysis shows.

If markets continue their decline from here as some suggest, then the above will be invalidated, but if markets continue higher as I believe they will, I think the most likely time frame for a high is mid-to-late July, with a possible double top in mid-to-late August. We can confirm that a top is developing this summer by looking for major divergences in various breadth indicators as well as momentum indicators. Thereafter, I am anticipating a significant 3 wave (not 5 wave) decline into a mid-December low. The worst of the decline will most likely come in October and November.

Based on my analysis of the decadal pivot in the SP500 that I presented previously on 4/23, I suspect that the correction this fall will retrace an equal distance below the pivot as the expected high is above it this summer, but most probably no lower than 950.

Robert Prechter has done some very nice work in his latest Theorist for a projected nominal low for the secular bear market in 2016. Please check it out via the link above. I differ with him in that I think we will see a second major leg up into late 2011 or early 2012 for this cyclical bull market, and then a major move down into 2016, as opposed to continuing down from this fall's coming selloff.

I also disagree with his understanding of the head and shoulders top formation that has developed over the last decade. Tom Bulkowski at thepatternsite.com has done a lot of nice statistical work on patterns, and according to his work only 55% of head and shoulders tops meet the projected price target. I don't know what the distribution of his results are, but my previous experience suggests that a more probable target is about 2/3 of the % meeting the target. For the Dow this works out to about 2,777 points. Subtracting that from the 3/6/09 low gives us a bear market target of 3693. I have believed all along that the most likely target zone for the bear market is the 1987 high of 2747 to 38.2% of the all time high or 5424. It is interesting to note that the lower trendline connecting the 2002 and 2009 bottoms projects to 5638 in July 2016 - pretty close to the 5424 target.

We can fairly easily project which target will be in play by seeing where we are in 2014 at the next 4 year cycle low (4 years from the low expected this fall). If we are already at the lower trendline in 2014, then we would expect the 2747 target. If we are well above the lower trendline in 2014, then the 5424 target will be the most probable.

These dates are quite some time away, but I think it is helpful to have some idea of the path that we are likely to take on the way to the bottom. Another thing that must be kept in mind if we breach the 5000 level in a significant way is that it will probably become increasingly difficult to short the market. Once we get to that level, we will probably just have to sit on the sidelines while waiting for rallies to go long.

Anyway, this is how I see it. I know it doesn't fit with the general expectations of the bears, but the widely accepted outcomes are not usually the ones that come to pass.