I believe technical analysis is something of an art form. As far as I can tell no one has yet put together an adequate methodology to accurately time the market. I am currently making such an effort by combining technical analysis, market breadth analysis, sentiment analysis and presidential or election year stock market cycles.
I have concentrated the majority of my efforts on the cyclical semiconductor sector. I have borrowed charts and information from a wide variety of people and sites:
For technical analysis I use StockCharts.com charts and refer to their explanations on a regular basis as I did here in this post tonight about the SMH possibly facing a double top breakdown:
I have made some charts on short term timing of the SMH which will show it is oversold and due a bounce here but that bounce will have to come on high volume to break 35:
Just keep clicking through the posts when you get there because I think there is a lot of good information including this posts using charts from Chart of the Day that refer to past Presidential Cycles and Election Year Cycles:
Technical analysis is my favorite form of market analysis. Over the last couple of years I have spent a lot of time making charts and reading explanations shared by others. As I said at the beginning of this post it is important to understand that technical analysis is more art than science. I am currently a big believer in volume as a leading indicator. As such I follow the major market charts on a daily basis. Market tops are generally formed with lots of volume. Big up days and big down days but when the volume begins to be largely down even as the market makes new highs like it did in early March for the DJIA and S&P 500 bulls should be worried.
The NASDAQ is already in big trouble as you can see because since the first of the year it has been making lower highs and lower lows. Note that high volume down day in early January that really set the tone.
If you believe in Presidential or Election Year cycles as I do then you accept the premise that Stock Market tops often take place by the end of an Election Year (2004 was an Election Year) plus or minus one quarter. As of the first of the year money began to rotate out of technology stocks on the NASDAQ into an ever dwindling number of stocks on the S&P 500 and DJIA.
Currently the market sits in a very precarious position. I do expect support to hold and for a half hearted rebound effort to take place soon enough that will fail. What could change my mind?
Broad based high volume institutional buying.
In the absence of that kind of high volume buying the rally will fail leading to a similar series of lower highs and lower lows for all the major indices.
I am currently expecting the next major bottom for the market to form in or around October 2006. And why not. The last two major bottoms formed in October 1998 and then 4 years later in October 2002. These bottoms perfectly corresponded to Election Year Cycles and were also marked by huge spikes higher in the Volatility Indices:
Today the market is rife with negative divergences that could correlate to a major market top. But with most investors investment perspective being colored by the gains achieved during the bubble years that led up to the top in 2000 the potential for further declines is being under appreciated.
Inflation is on the rise and may be too much for the market to deal with if the FED drains the punch bowl:
But it is actual recessions or at least the fear of a recession that really deals the market a bearish death blow. The yield curve is extremely useful in predicting the upcoming recessions:
Again, I do expect a short term rally. But this rally should fail in 2005 and should, unlike 2004 which also started badly, actually end badly as the FED tightens money supply and raises rates. There is so much more I could say but others cover the territory with a great deal more clarity than I could ever hope to add here.
The charts speak for themselves.
The final thought I want to highlight is simply that market tops generally form with negative divergences and high volume. Market bottoms generally form with low volume and positive divergences.
Knowing where you are in any particular cycle can be difficult to ascertain but many times it's just as important to know where you are not at.
Market Internals: Stocks remained under selling pressure during the latest week of trading. In fact, the Dow Jones Industrial Average ($INDU) fell on four days during this holiday-abbreviated week of trading. Volume was lackluster on Thursday because many traders left early to enjoy the holiday weekend, but market internals on the New York Stock Exchange [NYSE] were extremely poor during the first three trading days of the week. For instance, notice from the table above, NYSE advancing issued trailed declining issues nearly three-to-one on Monday through Tuesday and nearly four-to-one on Wednesday. No contest between up and down volume during those three trading days. Clearly, investors have not been in a buying mood lately. The NYSE New High New Low Index slipped to –141 on Wednesday, compared to +13 on Friday.
The Nasdaq Composite Index ($COMPQ) moved less than a point during three of this week’s four trading sessions. Volume was light and the composite index lost approximately 16 points on the week. Market internals were mixed, with up volume beating down volume during three of four trading days. Is money beginning to move back into tech? It’s too early to tell, and the technical action on the Nasdaq Stock Market still leaves a lot to be desired. For example, advancing issues trailed declining issues during three of past four trading sessions. Nevertheless, Nasdaq stocks held up much better than their NYSE counterparts since last Friday.
Sentiment Data: The bears are really beginning to growl as the stock market continues to slip from one day to the next. The most obvious sign that investors have turned defensive or bearish is the Chicago Board Options Exchange [CBOE]. It has risen above 1.00 during six of the past eleven trading sessions. When this ratio rises above 1.00, it indicates that more puts traded on the CBOE when compared to calls. The last time there were so many high readings from this indicator was in October of last year, which also happened to be an important market bottom. The ten-day average of this ratio is now 1.00 and its highest levels since May 2004. Therefore, from a contrarian view, the spike in the CBOE put-to-call ratio is a bullish sign. It indicates that investors might have overreacted and that stocks are oversold. (For more on this ratio, please see Index Intelligence: What’s Bullish About the CBOE Put/Call Ratio? March 24, 2005.)
Similarly, the International Securities Exchange Sentiment Index [ISEE] fell to multi-month lows on Wednesday. This indicator is computed as call buying divided by put buying on the International Securities Exchange [ISE] multiplied by 100. The ISE now the largest US options exchange. When the ISE Sentiment Index declines, it indicates that call buying is declining relative to put buying. Wednesday, it fell to 119 and its lowest reading since October 2004.
However, while the CBOE put-to-call ratio and the ISEE are consistent with high levels of bearish sentiment, and have moved to levels witnessed during other recent market bottoms, it might be too early to conclude that investors have capitulated. For one, other indicators are not pointing to extreme bearishness. For example, volume hasn’t been running exceptionally high, which would normally occur during a period of capitulation. In addition, the CBOE Volatility Index ($VIX) is not far from where it was one week ago. It rose from 13.14 to 13.42 in the latest week of trading. When the market bottomed in October, the market’s so-called fear gauge was near 17.00. The latest surveys of investor attitudes are not consistent with capitulation either. For example, the most widely watched survey by Investors Intelligence shows 53.6% bullish and only 27.8% bearish, which is better than last week (54.4% vs. 24.3%), but not consistent with extreme bearish sentiment.
So, rather than trading the market aggressively one way or another, traders might want to look at specific sectors or industry groups that have developed a bullish or bearish bias. There is a chance now that bearish sentiment has risen far enough to set the table for another rebound like in May and October of last year. Indeed, some of the sentiment indicators are returning to those levels. However, a more legitimate bottom can be formed if the bearish sentiment stays high for several weeks or months, but that, of course, would also mean that stocks fall from here.
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