Formation of Meaningful Low In Stocks Remains Unlikely

The S&P 500 index closed moderately higher yesterday, reacting off of recent short-term lows of the violent downtrend from April and returning to long-term support at the 200-day moving average.


With respect to cycle analysis, the early formation of the alpha high (AH) after only six sessions was a bearish development that favors the continuation of left translation. Therefore, the formation of a sustainable low at this time is unlikely, and any traders who are taking market positions based upon that assumption are aligning themselves with a low probability scenario, a strategy the invariably leads to poor performance over the long run.

The next short-term low will likely not develop until the upcoming beta low (BL), and cycle analysis provides a very clear window during which that low is expected to occur.

The primary failing of most market participants is that they tend to suffer from an extreme form of myopia. Most investors focus on the daily price movements of the major market indices. When stocks are up substantially, they feel bullish. When stocks fall precipitously, they become bearish.

The problem, of course, is that market behavior only has meaning when viewed in context. Short-term trends and cycles are subcomponents of intermediate-term trends and cycles, which are in turn subcomponents of long-term trends and cycles. In order to understand what today’s market behavior means, it must be analyzed in terms of what has transpired previously across all relevant time frames.

That is why judiciously applied chart analysis is so successful at identifying the most likely scenarios and their associated probabilities; not only does it evaluate the highest quality fundamental and sentiment data available at the moment, it also provides the context required to correctly interpret price behavior. Granted, the market may not always be “right,” but it never loses an argument, which is why our focus is on interpreting market behavior and then aligning ourselves with it.