The Market Forecast

The keys to reading The Market Forecast listed below, are a few of the significant aspects of the graph's formations which are regularly discussed in the daily commentary section. These "keys" are subtleties that appear in the charts and help us more clearly identify the upcoming directional changes in the markets.

1) ‘Clusters’ of Cycles At KEY Turning Points

When short term lines (yellow, light blue) reach the upper or bottom reversal zones at or very close to the same time, along with the intermediate cycle (purple), it represents a significant cyclical eclipse where direction is ready to reverse for the next 4-8 weeks. Some clear clusters appeared on 10/9/02, 11/29/02 and a "near cluster" on 12/30/02.

2) When the Markets Move - So Do Most Stocks

Fight the fact if you will (most investors do but don't know they are), but most stocks will ultimately do what the market does. We saw the bottom on the market beginning on October 9th. The intermediate line then began a sharp move back up after the "cluster". appeared. At that point, and for the weeks that followed, you could have almost used a dart to pick which stock was also moving up. A rising tide does lift (most) boats. I decided long ago, why follow stocks that don't follow the market, the ability to predict their moves becomes too laborious. At the end of November, most stocks then began to fall as the intermediate cycle topped out (with another cluster), and markets fell through the end of December.

3) The Easiest Cycle for Most Investors to Trade: The Intermediate Line

Made bold below, the intermediate cycle moves slower and more steadily than the other two shorter term cycles and is thus easier for most investors to trade.

An option example below shows a simple trade relying on an entry point where a clustered bottom occurred on 10/9 with an early exit point developing afterwards as the intermediate line started to flatten out on 11/6.

A nice gain of 168% for one month!

When the OEX bottomed on October 9, 2002, it followed the Dow 's intermediate forecast line perfectly. From there it rose from 375 to its first consolidation point of 475 on November 6. A move up of 100 points on the index in just one month. That equated to a move from 28 to 75 on the January 400 calls!

All you had to do was follow the entry and exit signals on the intermediate line indicated by the clustered shorter term cycle lines.

4) Rising Bottoms and Declining Tops

In a rising intermediate trend the short term line will make higher pull-back bottoms that provides ongoing evidence for a continued move up. The inverse is true as the intermediate line declines; the short term line will make declining tops. As the short term line progresses in the trend, an eventual cluster will form at the top or bottom indicating a change of direction is imminent. An example of both is presented below:

5) Don't Be Shaken Out by the Short Term Oscillations

During an intermediate trend, both the short term and momentum cycles will be moving up and down causing the market to move forward and pull back. Short term traders can play the basic trend of the markets intermediate cycle (long or short) while using a smaller cluster (short term and momentum only) to enter and exit. For example, entering long on 10/9 the first exit would be on 10/15 or 10/21. Another long entry on the rising bottoms of 10/28 with an exit on 11/6.

Those following the intermediate trend need to avoid every short term signal and just "enjoy the ride" as that line takes 4-6 weeks to mature and complete its move. They would wait for a full cluster exit point as appeared on 11/29 or near cluster on 11/6.

6) Each Cycle Affects the Next Shorter Cycle's Strength

When the long term line is rising, it will usually give strength to the move up on the intermediate line. Likewise, when the long term line is falling, the intermediate line can be kept from moving up strong during its cyclical upswing.

All of the concepts discussed above are mentioned in the daily commentary as they develop in the markets. They are included here to help you become aware of the terminology that will be used from time to time. They will become part of your vocabulary over time as you begin to read the charts and commentaries and see these concepts take form in real time in our markets. As part of The Market Forecast, they will help you more fully understand some of the market's overall motion and help you anticipate where markets are likely to go next.