Saturday, September 18, 2010

A Look At The Big Picture

It has been a while since I showed the SP500 Big Picture chart. Anyone who has followed the financial media in the past week has probably heard how great everything is. By all accounts, the worst is over with the markets, if not the economy. It is amazing how much positive sentiment can be generated by a 3 week rally that has yet to close above the previous swing high, which is why it is so important that we look at it in the context of the entire secular bear market.

So far this cyclical bull market rally has only managed to close above the Decadal Pivot of 1160.75 for about 3 weeks. The rest of the time it has traded decisively below that level including during the rally that began August 27. The mid-point of the decline from October 2007 to March 2009 is 1121.44. Friday the SP500 closed at 1125.59. In other words, the market is trading in a tight range around this mid-point and below the Decadal Pivot.

I have marked the 11 month congestion period when the market traded sideways after breaking above 1160.75 in 2004. Based on my latest cycle and pattern analysis, it is beginning to look like we are repeating an 11 month corrective period, but instead of trading sideways, the market looks to be heading downward in a zigzag type of pattern. If this proves to be the case, then the market can be expected to bottom sometime between January and March 2011. This viewpoint fits with a possible presidential cycle inversion that could occur in the next one to two weeks.

As frustrating as the corrective market action can be, we should not lose sight of the fact that if the market does trade down into this time period, it will likely move back down toward if not test the longer term trendline breakout in the zone I have labeled as the "Buy Zone". This would be the setup for the next leg up in the cyclical bull market. Being a [C] or [Y] wave, this next leg has the potential to be even stronger than the first leg up, but such an expectation should be tempered with the understanding that we are still in a long term secular bear market, and bearish forces will probably temper the strength of the rally. A measured move target for this next leg up based on the above interpretation is around 1485, in the middle of the "Sell Zone".

In conclusion, it appears that we are still a few months away from a more tradable market bottom. Traders need to be cautious as whipsaws will continue to be the rule and shorter term trading tactics with reduced exposure or staying in cash may be the best approach.

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