WEEKLY INDICATORS ARE ROLLING OVER -- WHY THE FOUR-YEAR CYCLE MAY BE PEAKING -- SIMILARITIES TO THE 1970S

WATCH OUT FOR DIVERGENCES IN WAVE FIVE ... Last Friday I expressed my belief that the cyclical bull market that began in October 2002 had probably ended. That belief was based partially on my Elliott wave view that the fifth and final upwave that started last summer had ended. I also showed that short-term technical indicators had turned negative. I mentioned that the weekly indicators were starting to roll over, but I didn't actually show them. I'll do that today in Chart 1. I've overlaid my five-wave Elliott interpretation on the weekly bars. To refresh your memory, bull markets usually end after a five-wave advance. It looks to me like the last move into new high ground was a fifth wave. Negative divergences on weekly indicators are especially noteworthy in a fifth wave advance. And there are a couple of them in Chart 1. The first concern is the negative divergence in the 9-week RSI line (see blue arrow). The recent move to new highs by the S&P 500 wasn't confirmed by the RSI. Of even more concern is the fact that the weekly MACD lines not only show a negative divergence, but are actually turning negative (see red arrow). That's a double negative. Last week's price bar also shows the downside weekly reversal that I referred to on Friday. That occurs when the weekly bar hits a new intra-week high, but then closes lower for the week (see red box). That's another bad sign. Last week's selling also came on higher volume, while price bounces have been on light volume.

Chart 1

LONGER-TERM DIVERGENCES ... The weekly bars in Chart 2 show the entire two-year cyclical bull market that started in October 2002. Here again, I've labeled what I believe to be the completion of a major five-wave advance. [Chart 1 shows a five-wave advance starting last August. Chart 2 shows that the rally from last August (4) was actually the fifth and final upwave in the entire bull market. That makes the recent peak the fifth wave in a fifth wave]. This longer-range view in Chart 2 makes the negative divergences in Chart 1 look even worse. The March 2003 bottom was forewarned by bullish divergences in both the 9-week RSI and the weekly MACD lines (see green trendlines and arrows). In other words, both indicators turned up before prices did. In March 2005, both the RSI and MACD lines are showing big negative divergences (see red trendlines and arrows). In other words, they've already turned down and hint that prices may be headed in the same direction. That's because the RSI and MACD are considered to be leading indicators of price direction. That's especially dangerous in a fifth wave. It's also dangerous at this time of the year (March) and in the middle of the four-year presidential cycle.

Chart 2

THE CYCLE PEAK SHIFTS WITH SECULAR TREND... The reason why March is a dangerous month is because it has marked important market turns in three out of the last five years -- one up (2003) and two down (2000 and 2002). There's also a strong possibility that the four-year presidential cycle may be peaking. Here's why. Cycles are usually measured from trough to trough which are considered to be more reliable than cycle peaks. The history of the market bottoming every four years is remarkably consistent. Chart 3 shows the last four troughs in 2002, 1998, 1994, and 1990 (see red circles). In an ideal cycle, the middle peak occurs at the midpoint of the cycle. In a secular bull market, however, the cycle peak shifts to the right (called right translation). During the two-decade secular bull that started in 1982, the four-year cycles usually had three up years followed by one down year. Chart 3 shows that pattern in the two cycles from 1990 to 1998. The troughs were in 1990, 1994, and 1998. The peaks were in 1993 and 1998. The pattern changed, however, after 1998. At best, we can count two up years from October 1998 to the second half of 2000 in the S&P which was followed by two down years into the second half of 2002. [A more bearish read is that the four years after 1998 showed only one up year (1999) and three down years (2000 to 2002), which is more symptomatic of a secular bear market].

Chart 3

IN A TRADING RANGE, IT'S TWO YEARS UP AND TWO DOWN... In a secular bear market, the normal pattern would most likely be three down years followed by one up year to complete the four year cycle. The cycle low still occurs every four years (the next one being due in 2006), but the middle peak shifts to the left (left translation). One could argue that's what happened from 1998 to 2002. If we are truly in a secular bear market at present, however, the bull market that started in October 2002 should have only lasted one year. It actually lasted two. That suggests to me that we're most likely in a secular trading range. In a trading range market (absent any long-term secular bullish or bearish influence), the market is in balance. In that case, the most likely expectation for the four-year cycle would be two up years followed by two down years. Since we've already had two up years since October 2002 (2003 and 2004), I would expect this year (2005) and next year to be down years culminating in the next cycle trough in October 2006. There's historical precedence for that pattern.

SIMILARITIES TO THE 1970S SUGGEST TRADING RANGE MARKET... This is a subject which needs to be dealt with in more depth. I'm just going to introduce it here for historical perspective. There are a lot of similarities to the current decade and the 1970's. That was the last decade of soaring commodity prices and a falling dollar. It was also a decade of rising interest rates and a generally flat stock market. More to the point, it was a decade that saw alternating two-year bull markets in stocks followed by two-year bear markets. In other words, the peak in the presidential cycle occured midway through the four years. I suspect that's what we're going to see in this decade. And, if I'm right about that, there's a very strong chance that we've completed the two years up and are starting the two years down.