Current Observations

The stock market has reached a fascinating juncture.   The cycle projections have done a fabulous job of guiding our expectations for the market up to this point.   This is depicted in this chart, a weekly projection chart for the Dow Jones Industrial Average that goes back to the middle of 2007. This particular chart was constructed by drawing a line from week to week that was centered each week on the median price for the week.   The median price is simply represented as the average of the high and low price for the week.  

In order to generate what is called a nominal 78-80 week cycle projection, the median price line on the weekly chart is moved forward in time half of the duration of the cycle being measured.   In this case, a nominal 78 week cycle projection is set up by moving the median price forward 39 weeks.   We use two varying calculation techniques once a projection line has been crossed.   In the case of the 78-80 week nominal cycle projection, one of the techniques would involve varying the offset between 39-40 weeks and determining by the various crossing points what the range of the projection will be.   The alternate calculation technique is the one we have used on the current chart.   That simply involves calculating the crossing point of a 39 week offset and allowing for a 10% margin of error in that calculation.  

Let's walk you through the calculation of the nominal 78-80 week projection that was generated in January of this year.   There is a bold oval on the chart around the crossing point in January when the Dow weekly median moved below the 39 a week offset line.   By zooming in with the computer, we determined that the crossing point of the median line below the 39 week offset line of that same median occurred at a price of 12,612.50.   Once such a crossing occurs, a nominal 78-80 week projection is generated.   The high point preceding the crossing occurred in October 2007 at a price of 14,198.10 on the Dow.   If we measure the distance in points between that top and the crossing point of the median line below the offset line we come up with 1,585.60 points.   Price projection theory tells us this should be the halfway point to the nominal 78-80 week cycle bottom.   If we subtract another 1,585.60 points from the crossing point of 12,612.50, we arrive at a figure of 11,026.90.   As we noted above, we always allow for a 10% margin of error when using this calculation method.   The distance in points between the 14,198.10 high registered in October 2007 and the projected low of 11,026.90 is 3,171.20 points and 10% of that figure comes to 317.12.   We now have all the calculations required to present the cycle projection.   That formal projection would thus become 11,026.90 ±   317.12 points.   The low side of that projection window rounds off to a reading of 10,710.  

On this projection chart, the projection of 11,026.90 is represented by a horizontal bar that is labeled at that level.   The lower end of the projection, 10,710, is also depicted and labeled on the chart. Remember that those projection levels were determined a full 6 months prior to their being reached, but we have said all along since the projections were generated that they remain in effect until they are either met or invalidated. They have now been fully met. Cycle projection theory tells us that once a projection is met we should observe whether new and even lower projections have been generated by the crossing of other offset lines.   If so, then there is no strong evidence that a bottom has been seen. If not, then there is indeed evidence of a potential bottom.

We have placed two other offset lines on the chart, a 100 week offset and a 110 week offset.   Those lines and the range of offsets between them determine the calculation of the nominal 4 year cycle projections.   On the week when the recent July low was registered on the Dow, the nominal 100 week offset line was penetrated and a preliminary nominal 4 year cycle projection was generated.   Notice, however, that the longer offset line was not penetrated and has not been penetrated since then.   That sets up a fascinating market juncture.   The fact that the nominal 78-80 week downside projection generated in January of this year was finally met in July means we could have seen a bottom of some significance.   As long as the Dow's median price line remains above both the 4 year offset lines, a case can be made that the market has reached a bottom.   If, however, the projection lines are crossed to the downside, then a significantly lower nominal 4 year downside projection will be given.   As this part of the newsletter is being written on Thursday night, July 31st, the median for the week is around 20 points below the 100 week offset line but over 300 points above the 110 week offset line.  

In such circumstances, it is usually a good idea to examine other important market indexes to determine if they can provide additional information. The next chart in this section gives us a different viewpoint with a different index but is also concerned with nominal 4 year cycle projections.   The construction of the chart requires a little explanation.   When constructing a weekly projection chart for nominal 4 year cycle projections, the range of the offset lines is between 100-110 weeks.   If we translate the weekly chart to a daily chart that has been constructed for nominal 4 year projections, we want to duplicate the range of the offset lines that we use on the weekly charts.   The daily charts, however, are constructed using only trading days with holidays, Saturdays, and Sundays omitted and these omissions must be taken into consideration when translating weekly projection lines into daily chart projection lines.   Without going through the math with you, let's just tell you there are around 4.82-4.84 trading days per market week, on average.   We use an offset of 484 trading days to represent a 100 week offset and we use an offset of 533 trading days to represent a 110 week offset.   Those are the offset lines you see in the chart.  

The other major difference between this day the chart and a weekly chart on the front page is that we are using the S&P 500 Index rather than the Dow Jones Industrial Average.   Noticed that in March of this year prices went slightly below the 484 day offset line for 2-3 days, rallied back above the line for a few days, then move below for one more day on the day of the March low.   Prices then rallied strongly above the 484 day offset line and made it clear that no four year downside projection would be given at that time.   Finally, on July 3rd as the S&P 500 moved below the March lows, it also moved below the 484 day offset line and has remained below it over the past month.   It is thus fair to say that the S&P 500 cash index has generated a preliminary nominal 4 year downside projection.   The cross below the projection line occurred at a price of 1,276.39.   The all-time high established in October 2007 was 1,576.09.   Cycle projection theory tells us that if the downside projection is confirmed, the crossing price of 1,276.39 should be at the 50% mark of the total decline.   That would mean a further decline of 299.7 points on the S&P, giving a downside projection of 976.69.   That represents a total decline of 599.4 points so a 10% margin of error would round off to 60 points.   The final four year projection thus becomes 976.69 ±   60 points on an intraday low basis.   The only thing remaining to confirm the 4 year projection is that the S&P also moved below the 533 day offset line.   At this point, it would appear safe to say that a move below 1225 on the S&P for more than a day or two would confirm the nominal 4 year downside projection.   Until or unless that happens, however, we must allow for the possibility that the market could be forming a short to intermediate term bottom.   The next few weeks could answer many of the projection questions.

September 2008

Today's chart has something for everyone. It is a daily chart of the S&P 500 cash index going back to mid-May of 2007. Perhaps the most important aspect of the chart is the cycle projection line which has now been convincingly penetrated to the downside and has thus generated a nominal 4 year downside projection. Many subscribers are privy to the technique we use to obtain cycle projections. The jagged line which begins around the 1200 level on the left side of the chart is simply the median price (the average of the high and low for the day) of the S&P 500 moved forward 485 trading days. There are approximately 485 trading days in 100 weeks and the offset used for a nominal 4 year cycle projection is between 100-110 weeks. To keep the chart relatively neat, we did not place the equivalent 110 week offset on the chart. If we had, it would have been placed forward around 533-534 trading days. As a general rule, once the shorter offset (in this case the 485 trading day offset) is crossed by the S&P index in real time, a projection is generated but it is called a preliminary projection. If both offset lines are penetrated, then we say the projection has been confirmed. Using a stricter interpretation, we also require that any offset between the shorter and longer offsets has also been penetrated in order to assure the confirmation of the projection.

There are some other points of information included on the chart. There is an almost perfect parallel channel with the upper channel line connecting the October 2007 high with the May 2008 high and the lower channel line connecting the August 2006 bottom with the January 2008 bottom. It is interesting to note that the projection box is well below the lower parallel channel line with the implication being that if the projection is indeed going to be met, either the lower channel line will be sharply violated or the projection will not be met until later on this year or early next year. You can tell from the chart that if the projection zone box is slid to the right several months, then it would eventually meet the lower channel line. Perhaps that will be the final resolution but it is not the only way the projection could be met.

The final point to be made on the chart concerns the proprietary filter line which we discussed in our last newsletter. As we noted in our last newsletter, excursions below the filter have been relatively rare historically but history has taught us that a break below this filter often leads to serious repercussions, both market-wise and economically. Consider that between April 1942 and May 1970 there were only six instances where the S&P index closed below the filter and the total number of days within those six instances amounted to only 13. Between the years 1982 and 2001, there was almost a 20 year period where there was not a single daily close below the filter. The last day to have seen a close below the filter for the S&P 500 cash index occurred on April 16th, 2003. The filter closed today, September 4th, at 1,202.99. The S&P nominal 4 year price projections tell us to expect the filter to be broken significantly.

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