25Jly2006

The SPX is trying to lead this market.
Over the weekend I took many non-market essential charts off of chart link, so that I can concentrate more specifically on the task at hand: where our market is heading. Since the world is playing follow the leader (NY). It would appear wherever our market goes in the near future, most international markets will follow. Let's examine the evidence.

In early May a major negative divergence occurred between the NDX/SPX. These types of divergences, both positive/negative, have signaled most important turning points throughout this bull market. This is clearly seen in the chart "derivative market" in the photo section. When the NDX/NAZ confirmed a medium term downtrend in the first few days of May, that negative divergence began to take its toll. Since then, the major indices have declined between 8.1% (SPX) and 17.3% (NDX). Since mid June, however, a positive divergence has been developing between the NDX/SPX as the market has declined. This is clearly seen in the chart "NDX.SPX", also in the photo section. As long as this divergence remains intact, the potential for a near term reversal of this medium term downtrend is present. Since the techs have been leading the decline let's review the NDX/NAZ first.

The NDX made its high for the year in the second week of January, but the market was not ready to go down. The SPX/NAZ still had an impulse wave to complete, which they did in the spring when they made new highs for the bull market. After the tech NDX/NAZ synchronized in mid April, see "NDXdaily and NAZdaily" charts in photo section, the downward pressure started to exert itself on the cyclical SPX/DOW. By early May the entire market was ready to decline. By mid June, however, all four indices had made a substantial low, and started to display positive RSI divergences: see the top of the "NDXdaily and NAZdaily" charts. The low failed to hold in the tech sector, as that was only the first five wave decline for the NDX/NAZ. The "techs" rallied for about three weeks in a "corrective abc" pattern, and then turned lower again right into the close on friday July 21st. The sharp decline from the beginning of July was also a 5 wave structure, and it equalled a fibonacci 61.8% relationship to the first decline from mid April to mid June. Potentially, the entire correction in the "techs" is a completed ABC zigzag, as labeled on the charts. A rally above the early July highs: NDX 1591 and NAZ 2190, would confirm this count. Now to examine the positively diverging cyclicals.

The SPX/DOW both topped in early May and corrected with the NDX/NAZ. The severity of the decline, at the recent lows, is about half that of the "techs", as noted above. The DOW declined in a zigzag, made a 61.8% retracement, and then declined in five waves, making new lows with the "techs". This is termed an "elongated flat", as the DOW has made a double bottom: see "DOWdaily" chart in photo section. The SPX declined in a simple zigzag into the mid June lows, however it failed to make a new low with the other three indices this past friday. It had the same five wave decline as the others, but its failure to make a new low suggests it is a "failed flat" structure: see "SPXdaily" chart in photo section. This is a positive structure that forms when a market is gathering strength for the next advance. A rally above the early June highs: SPX 1291 and DOW 11,300 would confirm this count.

Reviewing the cyclical TRANsports and the tech SOX index for additional evidence of a potential low, I observed the following. The TRAN have declined 13% into fridays low, and remained under pressure tuesday. Yet, during the recent late June counter trend rally, it was just 1% short of making all time new highs: displaying greater relative strength than all the indices. The entire correction here also appears to be a "flat", just like the other cyclicals, as the recent rally was a "corrective abc", and the decline five waves. The SOX index has been devastated: declining 31.4% since it topped with the NDX in early January. This semiconductor index displays many individual issues that have dropped more than 50%. The correction, which actually started much earlier than all the other indices, can be counted as a completed double zigzag. The first zigzag completing in March, a counter trend rally, and then the second zigzag completing within the last few days. These charts are in the chart link.

To summarize. The market is in a good technical position to attempt a sustainable rally. It has already discounted a turndown of some degree within the economy, the ongoing turmoil in the Middle East, and the continuing inflationary pressures of higher commodity prices. What it has not discounted is a pause in the regular incremental hikes of short term rates. The market still has to prove itself, by not going lower and exceeding those specific levels mentioned above. Until this occurs, I remain neutral long term, and certainly not bearish. This correction is still inline with all the other corrections of this bull market. Until that changes, or the April 2005 lows are exceeded, I'll remain neutral to bullish.