Technical Watch Cumulative Charts

Cumulative Data
Week Ending 9/24/04

With August now out of the way, we now turn our attention to the scheduled time period for the nesting of the 9 month cycle low with regard to price due ideally next Friday, September 10, plus or minus two weeks. Interestingly enough, the three year anniversary of 9/11 comes the following Saturday, and this outside event could create the type of emotional action and reaction in which this cycle bottom mimics...in which stocks rally up from instead of declining into this same price bottoming period. However, we also have to remember that the larger 4 year cycle's harmonic 2nd quadrant bottom is also due within the next month as well, so we could be in for a rather bumpy ride for the next two weeks as these two time cycles go about their business of bottoming - with the 9 month actually nesting and then is somewhat held back by what should be a robust advance out of this same bottom because of the influence of this larger 4 year cycle's personality.

The nesting of the 9 month cycle appears to have bottomed on September 8th, two days before the ideal date of September 10th. Evidence of this bottom is more apparent with the NASDAQ exchange than either the NYSE or AMEX as shown with the charts below. This now leaves us with the final bottoming process of the harmonic 2 year low of the 4 year cycle which, if recent history of the 9 month is any indication, we should expect the nesting of this cycle to also come in pretty much on time in the early part of October, and from where an important price rally should then be able to begin in earnest.

(Please note: the author will again be traveling over the next two weeks, so no comments will be made during this time period. Because of this, next weeks charts and BPI data updates will be late in posting, but every attempt will be made to expedite these same updates in a timely manner.)

The cumulative NYSE advance/decline volume line has continued its constructive process by breaking above the declining tops line (shown in purple) two weeks ago. This action has now created a bullish configuration of its accompanied EMA's to reconfirm this breakout as having the legs to continue on an intermediate term basis. The next technical expectation would be a move back to or towards this same breakout line as is the case at the present time. Near term, the 20 day EMA (10% trend) has provided initial support of this continuing constructive, foundational behavior, and where the key test of this bullish pattern will be as we approach the intermediate term 40 day EMA (5% trend) and the longer term 200 day EMA (1% trend). A break back below these same EMA's would suggest that something else is going on that would need our attention.

The NYSE cumulative A/D breadth continues to move in all time high territory, with the structure of the advance from the July/August double bottom formation taking on a jagged appearance. This would suggest that money is being very selective and not indicative of what would be normal in a bear market where fast, smooth moves in the A/D would be apparent. This accelerated move has now pulled the faster 20 and 40 day EMA's further apart to a point in which can not be maintained for too much longer and that a deceleration of this upward move is to be expected. This idea is best represented by the high readings of the NYSE McClellan Summation Index shown below.

In my commentary absence over the last couple of weeks, the NYSE MCSUM/price chart has been updated with key comments in what to look for in the patterns shown. One of these important observations is that the McClellan Summation Index was entering a zone in which trend resistance of the cumulative A/D breadth was to be expected, and in which the MCSUM is now moving lower from the upper boundary of this same resistance zone. If one were to take their line of vision over to the March 2004 period, you will notice the two ledge formations that were formed that were the parameters of this same zone.

Another important observation is how the Summation Index has traveled in this same time period by showing no hesitation to the upward advance as opposed to the hesitation areas of the move down of last spring's decline in this same indicator. Smooth movements like this represent the path of least resistance, and in this particular case, is very bullish for the intermediate to longer term trend for this exchange's price index and the other indices that are heavily weighted with these same exchange's stocks. With the McClellan Oscillator now beginning the process of relieving the extended period it took to remain above the zero line for the MCSUM to move to the recent +983 high level, the rising support line drawn on the chart (in purple) should be able to contain any correction of these previous excesses that have come before, and where a break of this same support line would suggest a more extended move back down to or towards the zero line to better relieve this very "overbought" condition. It will then be from this future bottom where it will be very important for A/D volume to either lead or maintain a correlated A/D breadth relationship if the price action itself is going to be able to break above the June highs, and if this is accomplished, new recovery if not new all time highs in the New York Composite Index will be the direct result based on the positive money flow of the last 6 weeks as represented by the NYSE cumulative A/D breadth line itself.

The McClellan Oscillator continues to move within a larger triangle which best represents the New York Composite trading range price action of the last 6 months. A move out of this same triangle should then be respected for what it suggests with regards to this same trading range. On a near term note, Friday's market action generated a less than 4 point change in the NYSE MCO, so expect a dramatic move in the major market averages in the next two trading sessions. With the MCO currently internally "oversold", along with being near the support line of the trading range triangle noted, this dramatic move event should more than likely be to the upside.

Both the cumulative TICK and NYSE new highs/new lows continue to support bullish configurations, with the NHNL at all time record highs, and where a well deserved rest in this accelerated upside pattern should be expected near term.

Bottom Line: With the A/D volume now joining the party, the NYSE is now on a "GO" buy signal where any near term price pullbacks being viewed as buying opportunities for the intermediate term of market depending on individual chart merit. However, with this same volume data continuing to bring up the rear, these same anticipated pullbacks should be broad based with respect to breadth of market to relieve its short term over-extended condition, but it will be very important that downside volume doesn't pick up with any broader based breadth and/or price decline that might materialize. As long as this expectation remains true to form then, any price pullbacks from this juncture should be looked upon as the market getting back more into gear internally which should then set the final piece of the foundational process where price can then springboard above the April and June overhead resistance areas shown on the price chart above.

The NASDAQ cumulative advance decline volume line gives a good visual representation of the nesting effect of the 9 month cycle bottom where the event generated a robust move up out of this bottom (as opposed to moving down into it) and quickly moved through the 5% trend (40 day EMA) before continuing to move back above the 1% trend (200 day EMA) in the process. This move has now moved the shorter term 20 day EMA back above the intermediate term 40 day EMA, but both still remain below the longer term 200 day EMA. Near term, it will be important that these same converging EMA's support this data's technical snapback to these same EMA breakout "trendlines", and if successfully accomplished, this would then allow the volume line to move up to test the spring and early summer highs shown on the chart. However, if unsuccessful, a break back below this same congestive area would be a very negative event, and would suggest that a test of the 1750 price lows of August would then become the next technical expectation for the NASDAQ Composite Index - and where holding A/D volume support above the August lows will be extremely important for this same intermediate term price structure.

The bottoming of the 9 month cycle is also shown on the NASDAQ cumulative A/D breadth chart shown below where the move up from support of the 5% trend took place, but it wasn't as robust as one would expect coming out of such an important cycle low as this one is. This would then be consistent to the idea that the harmonic low of the larger 4 year might be having an negative influence in this area. Currently, both the 10% and 5% trends are giving initial support after last weeks price softness. As with the NASDAQ A/D volume line, it will be important that these EMA's provide support at this juncture, and where a break back below this area would gain additional evidence that the 1750 price lows of August would then be the next technical expectation - and where the August lows with respect to this data will need to hold or something else might be going on that would need our attention.

The NASDAQ McClellan Summation Index has now moved above the zero line for the first time since last March, and has now stalled. Additionally, we also had a larger separation MCSUM breakout of this money flow indicator at the area of the declining tops line (not shown) of the April and July periods. Together, this now suggests that a key internal low was generated with the August 12th bottom. Since allot of work has now been done in this area, a pause in this advancing pattern is to be expected, with the same extended MCSUM gap breakout area now acting as support on any pullback that may occur over the next couple of weeks. Another important bullish development is the way the MCSUM has moved from the lows to the zero line - nice and smooth with no hesitations to the pattern.

Interestingly enough, the pause in the Summation is also taking place where overhead price resistance lies with the NASDAQ Composite Index itself. It will take the Summation Index to make new recovery highs now for price to actually have the fuel to break above this same overhead resistance area.

The NASDAQ McClellan Oscillator has finally broken down from the sideways pattern shown on the chart, and has found initial support at the zero line. The next technical expectation would be for the MCO to move back to or towards the lower boundary of this sideways pattern at the +25 level, and from where we should then see our first test of the divergent lows support line from the July/August period. As with the NYSE MCO, the NASDAQ MCO generated a small point change after Friday's trading, so expect a dramatic move in the major market averages of this exchange in the next two trading sessions. And as with the NYSE MCO being internally oversold, this dramatic move should be to the upside.

Unfortunately, there still seems to be feed problems with respect to the cumulative TICKQ data, so there will be no commentary updates in this area until we start getting better consistency in which to work with.

The NASDAQ cumulative new highs/new lows is now up against near term resistance of its intermediate term 40 day EMA (5% trend). A break above this "trendline" would be bullish short term, and where with any near term weakness it will be important that the shorter term 20 day EMA provide support in this exchange's continuing effort to remain constructive.

Bottom Line: The NASDAQ continues to be the weakest of the exchanges, but where liquidity can now be termed as neutral. In order for the overall equities market to break out of the trading range of the last nine months, it will need the growth area of the market, as represented by the NASDAQ, to also show participation as well. Because of this, the focus over the next couple of weeks should be primarily in this area where one would want to see any short term corrections being more confined to the NYSE, with the NASDAQ group of stocks remaining more buoyant, if not leading, during this same time period.

The AMEX cumulative A/D volume and breadth continues to show bullish configurations with volume leading the way. With this exchange heavily weighted with energy and precious metals stocks, as well as Exchange Traded Funds, this is really no big surprise as it is in these areas in which advancing price moves have occurred over the last two weeks.

This price action has now moved the AMEX cumulative new highs/new lows above its shorter term EMA's over this same time period, although it continues to lag the advance decline data. This would suggest that many of the equities mentioned above, especially those in the precious metals area, are rallying from what were negative price configurations that were maintained going into the August 12th bottom and are far from making new recovery highs. With the cumulative A/D breadth now at near term overhead resistance, this should flatten out the NHNL line near term and where a positive cross over of its shorter term EMA's might be the result. However, as long as money continues to flow into this exchange as represented by the A/D volume, any near term pullbacks should be considered buying opportunities dependent on the sector area that best represents what the cumulative charts suggest.

Conclusions: The constructive behavior of the internals over the last seven weeks continues to support that the eventual price breakout of the trading range traced out over the last nine months will be to the upside once the final pieces of this foundational process are concluded. Besides what has been noted here with this weeks comments, these final pieces will be more with respect to the sentiment that will be needed to fully complete this bullish resolution, and this will probably happen with the nesting of the two year harmonic bottom of the four year cycle from the October 2002 price lows which, in itself, should be able to produce these same bearish sentiment extremes in areas such as put/call ratios, the Trading Index, Rydex ratios, and polling data such as the Fearless Forecasters.

Finally for this week, I would like to share some additional thoughts as it pertains to a type of methodology that some analysts use to further understand price pattern movements. Elliott Wave is a methodology that incorporates many facets, but its main gift is that it gives the market analyst and trader/investor a way to measure the mass psychology of any or all price pattern structures as to attempt to forecast the future movements of these same patterns. Without getting into all of the whys and what's of this methodology, this area of analysis consists of breaking down price pattern moves in the direction of the major trend into five "waves", which are then balanced with three wave counter trend structures to complete "a" wave pattern structure. These structures can be found in many different time frames from intraday action all the way up to monthly price data. Each one of these wave structures are accompanied by a definitive psychology in which helps the analyst to better determine the right "count" in which to trade by. 1st waves, for example, are accompanied by the mass mentality that nothing has changed from the preceding price pattern structure. This then sets up the extreme psychology of second waves where those who had believed that this wave one structure had changed nothing jump on the band wagon very quickly with the taunting attitude of "I told you so", and this usually happens very quickly at price levels that are no where near the price levels in which these extremes in this same sentiment previously occurred.

I bring this up this week for the author is seeing this mass psychology phenomenon taking place at this current juncture as the rally from the August lows has been continuously called into question as having nothing being changed from the previous 8 month correctional period, and many have been quick to say "I told you so" after having our first down week in many indices in over a month. The main focal point of the opposite side continues to point to areas such as the lack of volume, lack of growth leadership, option price complacency, lower longer term interest rates, and politics - both domestic and foreign. Because of this, if the influence of the harmonic low of the 4 year cycle continues to raise bearish sentiment going into the nesting of this bottom, and price is only able to retrace a fraction of the entire advance from the August lows concurrently, it could very well be that a third wave up in the current price patterns could occur once this cycle nesting has finally passed.

This observation would also be fully consistent to what the NYSE A/D breadth data is suggesting at this time as breadth will tend to lead price, and if we're able to continue to generate extremes in negative sentiment under this scenario, this is where third waves are able to become "wonders to behold" as those who were deeply negative finally recognize their errors, which then generates the necessary fuel to not only break above what was perceived zones of price resistance, but it will tend to do this in a most dramatic fashion.

Something to look for and think about as we move along over the next several weeks.

The above charts are courtesy of StockCharts.com

Comments provided are for informational purposes only
and not intended for trading purposes.

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