Cycle Analysis Signals Upcoming Turning Point

This Weekly Market Digest will cover the action for the week ending Friday, March 12th. Overall action was positive for the period as all three of the equity indices we track here at Portfolio Tilt closed higher. The NASDAQ continued its dominance as the leading market index, outpacing the Dow and S&P for the week with a 1.8% gain. Although the action was constructive, our sights are now set on the winding road ahead.

The NASDAQ is the first of the three equity indices to breach the prior intermediate highs from early January. This was accompanied by above-average volume, although overall volume declined from what we saw in the prior week.

As we discussed in our prior update, Don't Underestimate This Bull Market, the long term uptrend is still very much alive and healthy. However, the next major intermediate-term turning point may be just around the corner. Many of you should recall our discussion on the intermediate cycle bottom in mid-late March. We expect the market to throw some curve balls at the shorter-term active traders over the next week and a half as we grind into this very volatile, and important time window. This will be the focus for today, as the general market indices are basically unchanged in price from where they were in November, and the sustained long term trend has been on hold.

All major annotations have been made on the charts of the general market indices below. A few key observations that warrant mention. Prices are trading above all key EMA (exponential moving average) support lines, the EMA's are all trending to the upside, and they are moving in harmony. Harmony refers to the fact that the shorter term EMA's are trading above the long term EMA's, and this is indicative of the action seen when we have rising prices in a bull market. When a long term EMA crosses over a short term EMA, this is typically a warning sign that the underlying trend may be in the process of a reversal, and the EMA cross signal is a warning sign of upside momentum beginning to diminish.

Our momentum indicators all confirm a bullish primary trend, as our ADX trend indicator is clearly tilted in favor of the bulls, and the MACDH has been trending to the upside for nearly five consecutive weeks. The RSI remains above 50, indicating that overall control is in the hands of the bulls, and we are well below what could be considered heavily overbought.

 

 

 

 

Click below to move on to page 2 where we will begin with an analysis of the upcoming intermediate cycle bottom.

As you can see on the chart below, the next cycle bottom is just around the corner (blue line). We are less then a week away from reaching what we expect to be a notable turning point.

First, a caveat regarding this type analysis. Time cycle analysis is still considered to be very unconventional, and it does have its flaws. Blindly buying or selling stocks based on an upcoming cycle high or low is an extremely risky venture. However, use this information as a guideline to help anticipate turning points in the underlying trend. Keep an open mind, sometimes we see a bottom when a top was expected, and vice versa. Just know that a turning point is on the horizon, and once you are confident of its direction, act with conviction.

Moving back to the chart, we can see how each cycle peak (black line) corresponds with the beginning of a sideways/minor price correction that continues approximately up to the time of the next cycle bottom. I urge you all to take a moment and carefully study the chart below. The approximate date of the cycle low is March 22/23, with the cycle peaking at the end of May.

 

 

Next up is our Dow Theory chart. Last week, the Transports broke out to a new primary trend high, a price confirmation that is very bullish for the long term prospects of this bull market. The Industrials are slightly lagging, but this is acceptable as a simultaneous breakout in prices between the two indices is not required. The intermediate low circled in blue is now the next major support level.

 

 

The final charts for this issue of the Weekly Market Digest are the USD Index, and the VIX Volatility Index. The weekly Dollar price trend is still favoring a long position, as some of you may remember we flashed a buy signal a few weeks ago based on the simple 10/40 week EMA cross system we are using. This method is far from perfect, but we can see how over the last five years, it has done quite well at signaling long term turning points in the underlying price trend. During the prior five weeks, we have seen two Doji candlesticks printed near resistance, so a pullback to support is likely. I have boxed in the key range to follow over the next couple of weeks.

 

 

The VIX has returned to 17 again, right where it stood before the 10% slide in January. When prices consistently rise, investors grow accustomed to the trend, become complacent, and volatility declines. The VIX is a good measure of this  investor complacency, and volatility. Volatility cycles through periods of expansion and decline, with prices typically moving opposite the direction of the VIX. We will be carefully monitoring this index near the key support level shown in green, and we urge you to as well.

 

 

All investors and traders must stay in tune with the action of the general market indices, because underlying market action accounts for a substantial portion of the movement in an individual security. Keep in sync with the market by following our updates. We offer a variety of methods to connect with Portfolio Tilt in real-time. If you aren't already following us on Twitter, click here to do so. We Tweet new updates as soon as they are published here on the site, and even post exclusive morning/afternoon technical briefings for our followers. For you Facebook fans, we have a page as well. We also offer a morning briefing delivered to your inbox with all of our most recent updates, free and easy to subscribe to at the link here so be sure to sign up!