Friday, December 10, 2010

Heading Toward A Cycle Top

For some time now, from late last year, I expected that we would see a market low in the time frame around the middle of December 2010 to the middle of January 2011 with specific target dates of December 21 to January 6. I have done some additional cycle work this week that narrows the window to December 30 to January 6.

The typical pattern for the 10 month cycle, which can vary from 9 to 11 months, is 12 weeks up - 4 weeks down - 4 weeks up - 12 weeks down. In a strongly trending market the up weeks will increase and the down weeks will decrease. At the beginning of a new 4 year cycle, there will hardly be any down weeks. This was the case in 2009. In 2010, we saw a surge off of the February 5th 11 month cycle low followed by a selling panic that bottomed on July 1 - just shy of 5 months from the previous cycle low. At that point it was quite reasonable to believe that after a 4 to 8 week rally, the market would sell off into the next 11 month cycle low due around January 6. However, this has not occured, and with each passing day it seems more likely that it will not occur.

Apparently, the force of a larger cycle is at work here pulling the market up into a high. More than a couple of analysts have noted the 7.25 year cycle that has been in play since the 1974 bottom. 7.25 years subdivides into four 21.75 months quarter cycles and is related to a larger 45 year cycle.

In comparing the 2009 low to previous lows, the 1974 low has the greatest similarity, in my opinion, so perhaps I should have given greater weight to the extent of the rally off of that low which lasted from December 9, 1974 to September 22, 1975 for a period of 1 year, 9 months and 13 days (21 months and 13 days). This is pretty darn close to the 22 month cycle period I have been discussing for the last few months.

I had hoped that we would see a low this December or January to set up the next leg of this cyclical bull market, but it appears that will not be the case unless the market sells off hard into the end of the year starting Monday. Unfortunately, triangles have formed all over the place which indicate more upside over the coming week. (BIDU is an example) This strongly suggests to me that we are moving up to a major cycle high as indicated by the basic price tee in the chart of the Qs.

In support of this view is the fact that sentiment has reached extreme levels as measured by the TRIN, the PPO of the equity only put/call ratio, and sentiment surveys. In addition, the Absolute Breadth Index is setting up for another top, the High-Low Logic Index appears ready to breakout for a sell signal, and the McClellan Oscillator and Summation Indexes are diverging strongly against price as are the MACD and RSI. Volume has also been below average.

In short I now believe that a top of Intermediate if not Long term significance is near at hand. If so, we should see many weeks and possibly months of down to sideways market action. At the moment it is too early to say whether this is the top of the infamous Primary wave 2. Personally, I don't think it is. Rather, it is more likely that we will see a larger double top with highs 10 to 20 months apart after which a more powerful down leg will ensue into the 2016 low.

So what is there to do now? Based on the above I will not be buying stocks or adding to existing stock positions until there is a clear cut unambiguous cycle low. I will be trading the Qs and the metals using my basic trend following strategies, some of which are shown in the Strategy Tracker.

The selling after the end of the year may be surprisingly strong. Be prepared. If the market were to top in the same time as the 1975/76 rally, the top would be December 19, 2010, which is also amazingly close to the winter solstice date. However, I suspect the powers that be are working to keep it afloat until December 30 if at all possible. Unless we see selling materialize in a dramatic fashion beginning early next week, there is little doubt that the coming cycle turn will be an important top.

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