SP500: Market Cycles

The smallest cycle is 35 weeks and we are approximately 1/4 of the way through – so initially expect to see gains on the US markets until we reach it’s mid point (around mid July) where we could begin to see the decline lasting until around mid November 2011 where it should bottom out.
Using the markets bottom in March 2009 as my starting point, we can see that the crash was the results of several major cycles ending simultaneously. Around mid November 2011 we will see the 3 smaller cycles converge, which will in fact be the mid point to the larger cycle. This suggests that the market will not crash as deep as it did in 2009, but it could still be quite significant drop.

FTSE100: Update

So far the FTSE has failed to breach the 6100 area, and very close to touching the previous swing low at 5811. I have chosen a more sensitive form RSI to show the divergence that occurred during the run-up to 6100. Although this may back up my original post on 27th Feb, it is too soon to call for a price reversal.

As price action is within a consolidation, I can pay closer attention to the RSI which is approaching oversold – for this reason I expect a bullish pull-back within the current consolidation, before further declines. It should be noted that the weekly RSI setting is currently at 55 (neutral) so cannot see price going below 5514 unless the weekly RSI approaches the overbought area of 80+. If anything, the current choppy conditions of the FTSE is just a modest correction and expect the bull-run to regain strength and break the 6109 area for another leg higher.

SUMMARY:
Short Term: Bullish within the channel
Medium Term: Bearish retracement below 5811
Longer Term: Bullish and for price to break 6109

FTSE100: Market Breadth

Quite excessive divergences have been forming between the small-cap and large-cap stocks within the UK and US markets. Although this does not provide an accurate turning points in price or time, it does help provide a ‘heads-up’ to the possibility of a reversal, and aid me with alternative Elliott-Wave counts if specific price points are broken. In short, “The troops are struggling to keep up with the generals”.

 

If FTSE100 breaks 6100 convincingly and turns this into support, then this would indicate further gains and we can temporarily ignore the inter-market divergences. If however it fails to break the level of 6100 then falls below 5817, then my bias would lean towards a change in market direction and to call a possible top. Either way I have reduced my end of day (EOD) stock positions within my portfolio to the bare minimum and will await the market to decide.

DJI: Market Breadth

Divergences between DJI and the broader market hint at the possibility of a price reversal. In a healthy market we would expect the small-cap stocks converge with the large-cap, which is not evident in the chart below.

MAJOR INDICES: Relative Strength Analysis

By comparing the Major Indices and their percentage gains over the last 6 months, I can very quickly see which Indices are the better performers and rank them in order.  In turn this allows me to favour the stronger Indices when selecting industries or markets I wish to trade in. 

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FTSE350: Sector Analysis

SECTOR COMPARISON:
By directly comparing the sectors with each other, I can quickly rank the sectors in order of performance and either look for price action set-ups on stocks within those sectors, or to trade the sectors themselves. The Sectors in the chart below have been outperforming the FTSE100 over the last 3 months, and are all above their 50 and 200 eMA’s. The Sectors below aren’t necessarily from the previous chart, but have been selected as they either hint at potential trades to place, or they are of general interest as they may be at a reversal point.

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FTSE350 Trade: INVP

The three options I see available are to either set a buy stop order above the high of the day, a buy limit around the 50% retracement, or look for opportunities to go long Intraday. A safer option would be to place your stop beneath the 200eMA (around 494) or alternatively you could also use the 50% retracement for your stop if using the high of Friday to enter. Although I’d like to see the stochastic generate a buy signal prior to entry, I tend to find these only happen after the move has already taken place so I’m more than happy that the indicator is in the oversold zone.

FTSE350 Trade: MGCR

Morgan Crucible Company Plc: MGCR

This is a trade I entered on the 5th Jan which I’d consider to be a textbook ascending triangle. I got stopped out on the on the 13th after being a little too tight on my stop-loss, but in retrospect I’m quite glad as it does seem to have lost it’s pace. 

The move however isn’t over and may still have another go at the target of 288 – if I retraces further and turns 255 into support then I will look to re-enter with a relatively tight stop (probably around 249)
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“Trade what you see, not what you think…”

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FTSE350 Trade: HWDN

Breakaway gaps are usually seen after a market reversal and are a confirmation of the new trend. The heavy volume also adds weight to the move, and the gap itself is an ideal place to put your stop-loss.
Although I missed the original gap I believe there may still be an opportunity to go long as a 2nd gap has now appeared (also on a heavy volume day). Runaway gaps have a tendency to appear around the middle of a trend, which in turn allows us to project a likely profit objective – runaway gaps are also called measuring gaps for this very reason. 
It’s a shame I didn’t see this sooner as Friday would have allowed for a much tighter reward to risk – but even setting a buy stop order above the Friday high, with stop beneath 111.7 will allow potential for a 3:1 reward to risk trade. 
HWDN-3month
 

DJIA: Market Cycles

The chart below is the monthly chart of the Dow Jones industrial  from 1923 on a logarithmic
scale. I’m trying to isolate the major cycles to provide me with a greater idea of future direction.

DOW-Weekly-Cycles-and-projection

 

By taking a closer look at the weekly chart I can now project possible turning points which will aid with wave counting and future direction. This is by no means a precise method but will provide a general framework from which to work from.

To put it into context – here’s the original chart on a linear scale. A couple of thoughts spring to mind…
– The ‘Swinging 60’s’ weren’t that swinging for stocks…
– If a head and shoulders has been forming since 1998 then it won’t be confirmed until the Dow drops below 7000… The target would be somewhere around the floor, and I’ll either be exceedingly rich or wiped out for good – either way I doubt I’ll be trading….
– If we really have began a new bullish cycle we’ll be taking out the 2007 tops with ease.

 

Dow-Monthly-Cycles-from-1923-Linear