Natural progression of stock market cycles

Hi there, and welcome back to CRI's S&P 500 blog.

For the sake of breaking the repeated message for the last while - when in May, blah blah blah, I thought we ought to take a good look at where we have come from and where we may go if indeed we are entering a corrective period. 

First off, lets start by appreciating how symmetrical the market is. If one starts with the massive upward channel (double black lines) and then uses the end of July, 2010 as a pivot, one sees how we have gone through a 26 month cycle (double diagonal red line) from trough to peak. The 26 month cycle comes to an end in September, 2011 and suggests we will have to go through a new 26 month cycle after that. Regardless of weather the new cycle is up or down is not relevant here, just the appreciation for the fact that we are at an end of a cycle - not the beginning.

Alright, now back to the present...

After yet another failed rally attempt, we are now breaking support of the most recent bullish uptrend. Last week's bearish engulfing pattern has led to further weakness. The most recent 'stop' point (129.51) for traders has been broken and traders should now be very comfortably on the sidelines. Investors can still take comfort in the fact that the 13 EMA is still well above the 30 SMA suggesting we are still in a correction of a bull market. Should that relationship change, investors will be given the exit signal and we will officially end the bull market.

Now if we do continue to 'correct', where might we go? The most important number that jumps out at me is the good old 50% rule. A one year 50% rule suggests we ought to look for prices to pull back into the 118.40 (point 2.) area and a two year 50% rule suggest we ought to look for prices to pull back into the 110.60 (point 3.) area. This bracket (118 to 110) ought then to be a realistic zone for correction. Further supporting this argument is the fact that both the 200 SMA and the bottom of the massive channel (double black line)  are currently comfortably in this zone too.

Since our last 'investor' buy signal (110 area) the market has advanced more than 16% so all those that did do the trade should still feel very good. Should the market roll over here (and we do get an 'investor' sell signal) there shouldn't be too many complaints. But we will cross that bridge when we come to it.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com