The NASDAQ rallied off its 5 day moving average yesterday to
squeak out another new high. The Dow on the other hand, followed the lead of its
short term cycle and fell through that its 5 DMA, and as anticipated, quickly
moved down toward its 30 DMA.
Today, both indices have short term cycles in decline and with
that, we expect more weakness on each with initial support
at the 5 DMA on the
NASDAQ and the 30 DMA on the Dow. Once again, this type of "counter-trend"
weakness is... normal profit taking behavior, and is common to see
(just look at the number of short term cycle retreats since July) in longer term
up trends.
In fact, market breadth data continues to suggest that traders are
still accumulating shares in leading stocks, pushing them to new highs. The
number of new highs vs. new lows on the NYSE, closed with a bullish a ratio of
314:6 and was at 182:15 on the NASDAQ.
Never-the-less, we always get more cautious during short term
cycle retreats, especially when intermediate and long term cycles are
"fribulating" in the upper reversal zone. Short term retreats will ultimately
become the first cracks appearing in the ice once longer term up trends reach
exhaustion levels...
Short term and momentum cycles are now poised to provide
markets with a counter trend rally that could become temporarily explosive, even
against the stronger declining trend of the intermediate cycle. Besides the most
immediate resistance level at the indices 5 day moving averages, a more
energetic rally is likely to run into stronger selling resistance at previous
support levels of 12796 on the Dow and 2594 on the NASDAQ.
Volume has
been heavy on the sell side for the past week, ever since the 30 DMA was
violated when intermediate cycles finally began what was a long overdue
excursion into the lower reversal zone. What's interesting, is how fast the
cycles have traveled that distance on our charts, which normally takes 4-6
weeks. If the current selling rate were to continue, those lines would be ready
to recover with just one more week of downside.
However, recovery
rallies such as the one we are expecting, tend to provide the brief pauses in
the bearish action that forestall the end of the intermediate decline. Once
resistance is reached and markets stall, we'll watch for an expected resumption
of the intermediate decline and the opportunity at that point to re-short into
that strength.
The expected short term rally may be playable for very
short term traders (the rally may only last a couple days), so be mindful to
place tight stops underneath any long positions.
Short term cycles have worked their way lower over the past
several trading sessions, to a point where those cycles could now form another
"higher low" on our Forecast charts. Momentum cycles have stair-stepped lower as
well, and if both can now reverse together, their additive in-phase power could
jump start the waning intermediate trend.
It is critical if that scenario is to play out, that it happen in
the next couple of sessions without too much more downside first. The indices
are now below all three of their critical supporting averages (5,30,50 DMA's),
and if the indices simply stall at those averages instead of breaking back above
those lines, it would indicate the intermediate trend has another low to yet
establish.
The 5 day moving average is still trending up,
which if surpassed, would change our trading bias from neutral back to bullish.
Remember, big money institutional traders always use this type of weakness to
buy, and though this pullback has represented a couple hundred points on the
Dow, it is still with the "normal" range where buying - if it's going to happen,
is likely to get started. 
The Entry
Twenty Seven Trading
Days Later..
Short term cycles have begun to pullback as anticipated so look
for weakness over the next several days that could quickly bring the indices
down to their 5 or even possibly down their 20 to 30 day moving averages. Even
with a deeper drop to the 30 DMA, the longer term bull trend would likely remain
intact at this point.
It is also time for the intermediate cycle to begin its downward
phase. It is clearly deep in the upper reversal zone, and though it may only
"dip" at this point, that could represent market weakness that could be
prolonged not just for the next few days, but possibly the next few
weeks.
No reason to panic, but be ready for what could be some
pretty volatile moves ahead. Just don't forget to raise your stops and consider
taking profits just below the 5 day moving average for shorter term trades. On
an intermediate dip, most stocks are affected by action whereas short term
oscillations tend to be more limited in scope. For longer term trades, consider
stops below the indices 20 day moving average or no lower than the 30 DMA for
safety.
The Exit
