Stocks Complete the Formation of a Short-term Low

| September 1, 2010

Cycle analysis has been forecasting the imminent development of a short-term cycle low (STCL) in the stock market, and today’s massive rally has confirmed that the anticipated low occurred yesterday.

Two weeks ago, we postulated that this STCL might develop in conjunction with either the existing home sales report or GDP revision report last week, both of which were widely known to be negative in character. While the short-term turn did not actually accompany an anticipated “sell the rumor, buy the news” rally for either of these reports, the downtrend from August was unable to move appreciably lower on the negative data releases, indicating that the market was attempting to form a short-term low. Today’s sharp rise, spurred by a better than expected reading from the August PMI, confirms that the latest STCL is now in place.

The character of this next short-term cycle will be important to monitor closely, as it has the potential to provide an important signal with respect to the long-term trend.

The long-term topping formation in stocks is on the verge of a meaningful breakdown, so the strength and duration of the developing short-term uptrend will be important determinants of cyclical direction moving forward. If this next rally is relatively weak and the S&P 500 index subsequently returns to recent lows sometime during the next two to three weeks, a long-term breakdown confirming the start of a new cyclical downtrend from late April would become highly likely. However, if the rally instead advances to the early August high on heavy volume, the imminent long-term breakdown scenario would become less likely and an extension of the sideways consolidation pattern from May would be forecast. The stock market has officially entered another one of those “make or break” periods from both short-term and long-term perspectives, so it will be important to continue monitoring market behavior closely.

Category: Commentary, Market Update

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