A New High is Possible
As the stock market starts to buck, investors wonder what is going to happen next. My analysis suggests that there may be one more new highs left before we see a bigger correction.
Last week we got the latest earnings numbers from Intel and IBM and they were well received. Now the question is, will good earnings be enough to get prices moving back up?
If you have followed me and have read my past articles, you will know that by using cyclical modeling and Fractal analysis, it is possible to predict what the market will do with remarkable accuracy.
It also allows us to enter the markets at less risky points in time, when the odds of success are much higher. That is very important if you are using leverage to hedge against inflation and the hidden tax that you pay on your illusory capital gains. More leverage equals more risk. That is when precision becomes important.
The Mood is Bullish
First lets take a quick look at what the public and many funds are thinking and doing, by studying the latest Investors Intelligence data in chart form.
We see there is no fear. There are buyers on every dip.
When we subtract the percentage of bears from the percentage of bulls, we are at record levels of extreme bullishness, going back many years. Notice what happened last year at this time when we were at high levels of bullishness.
Chart 1
It's a Model Market
Today I have used cyclical modeling and fractal analysis to look at the general market. Below I have extrapolated time and price based projections onto the chart. It shows how I expect the stock market to act over the next month or more.
The orange arcs represent the 4 month cycle that I use to trade with. It has remained consistent over the years, although it does get fuzzy from time to time. It will shift to the right or left, but usually it is accurate within a fairly tight variable. I have also put in the 1 year cycle which is also usually reliable.
Here is How I See the Current Cyclical Environment
Lets start with the big cycles. The ones that are even bigger than the 1 year cycle. They are going up. We know this because the one year cycle is making higher highs and higher lows. It is also topping late in it's cycle. In cyclical analysis, late tops are known as late translation. It is a sign that the larger dominant cycles are still pushing hard up.
We see that the 1 year cycle is starting to go down to make its next low and is probably not going to give much upside lift for the next couple of months. In fact it should be exerting a downward bias.
So Why Do I think We Will Go Higher?
It appears the 4 month cycle is now in the ascendancy again and should give lift for another month (green arrow). There is also a 1 month cycle, which I have marked in blue. It has been coming in at the end of each month. We see a clear mid month low last month. We can expect that slight change in timing will cause some confusion as we get closer to the end of this month. It, combined with the lift from the 4 month cycle, should give enough upward momentum to make one last high next month.
Chart 2
Then I Add Fractals
Once I have my cyclical model in place, I use fractal analysis to confirm the probability of one last new high and to pinpoint targets of price and time.
When using cycles, fractal theory is used simplify the complex process of summation. Summation is basically the adding together of a series of cycles of different amplitude and duration using Fourier analysis. Cycles are essentially sine waves like you would see on an oscilloscope. Each one the same as the next. The difference is in duration and amplitude. Normally the longer the duration of a cycle, the higher the amplitude. The thing is, when you stack them or add them together they distort each other and become complex. They will vary depending on the timing of each underlying sine wave. At any given time there are many different cycles acting on price. These complex variables can be understood within the context of the parameters that are underlying the sum of all the cycles.
Sounds complicated but let me draw you simple illustration. Below we see what happens when we add a 1 month cycle to the 4 month cycle. Depending on the time shift sequence of each, the resulting combined structure can take on the form of a double top or a head and shoulders pattern, two well known chart formations (they may not be perfect like I have drawn them). That is summation using spectrum analysis.
Keep in mind there are many cycles, all exerting their influence on the trend we see on a price chart. Notice that although the shape of the 4 month cycle changes, the result is still the same, a top. Fractal theory is used to model the complex process by searching for the simple process underneath. They show us the simplest underlying path the move should take. That allows us to project time cluster probabilities. In this case, the time and amplitude of the top.
I generated 3 different data points in chart 1, which I have marked in with different colored dots. The dots represent the time and price where the move should change direction.
Interestingly, none of the variables I plugged in, said we will not go to a new high. Two were almost identical.
Bottom Line
I call this a "getting blood from a stone" trade.
We are clearly late in the 1 year cycle and a look at the investor sentiment gauges shows extreme bullishness. Therefore I subscribe to the "if there are that many people, dumb enough to be buying this high, then the Fat Boys will be happy to jig the price higher and sell to them" theory.
We should continue to work higher into next month. Possibly grinding higher most of the month. If we bolt higher early in the month and get close to the 1400 level, we will probably top early at that point (blue dot).
If we do not see steam to the upside within the next 2 weeks, then it means we get a correction into the summer that is bigger than most are expecting.
