Swing High & Bearish Divergence

Stocks formed a daily swing high on Thursday.

Thursday was day 14 for the daily equity cycle. A swing high on day 14 sets up a potential left translated daily cycle formation. That aligns with our longer term view that stocks are in their timing band for an intermediate cycle decline which we discussed here and here. Stocks are in their 4th daily cycle & which is another reason to expectant intermediate cycle decline. There is a bearish divergence developing on the TSI, which is something that we see a cycle tops. A close below the 10 day MA would signal the daily cycle decline.

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Watching for a Cycle Band Buy Signal

The daily equity cycle peaked on day 28 and formed a daily swing high on Friday. With stocks in their timing band for a daily cycle decline the swing high signals that the daily cycle decline is beginning.

While stocks broke below the 10 day MA on Friday they ended up closing above it to form a bullish reversal. This is setting up a possible cycle band buy signal. A break above 2782.81 will form a swing low above the upper daily cycle band confirming a cycle band buy signal.

While our cyclical expectation is for stocks to decline into a daily cycle low, the Advance/Decline line is delivering a bullish expectation.

The Advanced/Decline line has clearly broken out to new highs and stocks are likely to follow. So while stocks are in their timing band to seek out a DCL and formed a swing high, if a swing low forms here stocks could be setting up for a trending move.

Deja Vu All Over Again.

Stocks once again delivered a sell signal.

Editor’s note: Tonight’s report will seem very similar to last night’s report.

Tuesday was day 22 for the daily equity cycle. The new high on day 22 assures us of a right translated cycle formation. However Tuesday was the third day in a row with a large Selling on Strength number being printed.

Over 635 million is Selling on Strength printed on Friday. On Monday stocks printed 410 million more Selling on Strength. Stocks then printed an additional 776 million Selling on Strength on Tuesday. The over 1.7 billion in Selling on Strength over the past three days continues to signal that smart money is selling into the break out.

Potential Half Cycle Low

Stocks have been consolidating in a narrow range for over the past 2 weeks since emerging from the day 23 low. On Tuesday stocks broke bearishly out of consolidation.

Tuesday was day 17 for the daily equity cycle. Stocks had been closing above the upper daily cycle band prior to Tuesday which indicates that stocks are in a daily uptrend. So while stocks did break lower, stocks printed a bullish tail above the 50 day MA potentially setting up a half cycle low. Forming a swing low above the lower daily cycle band would indicate that stocks remain in their daily uptrend. Then a close back above the 10 day MA would confirm that day 17 hosted a half cycle low.

What we need to watch for if stocks do not form a swing low but instead closes below the lower daily cycle band. That not only would confirm that stocks are in a daily cycle decline. It would also signal that the intermediate cycle is in decline as well.

Bearish Shift for Stocks

Stocks broke lower on Tuesday shifting the odds towards a left translated daily cycle formation.

Tuesday was day 16 for the daily equity cycle. Had stocks broke higher on Tuesday that would have allowed us to construct the daily cycle trend line. Instead, stocks broke lower to close back in the volatility zone. Stocks also lost the 10 day MA and closed below the lower daily cycle band. Closing below the lower daily cycle band continues the daily downtrend. It also signals that the intermediate cycle is in decline. A left translated daily cycle formation will assure us of a left translated weekly cycle formation. And a left translated weekly cycle formation impacts our yearly cycle framework, which I will discuss in this week’s Weekend Report.

Transports Getting in Gear

The daily equity cycle is beginning to gain traction.

Stocks have formed a swing low, closed above the declining trend line and now have started to turn the 10 day MA higher. All of this confirms that day 34 hosted the DCL

And the Transports are getting in gear.

The Transports printed their lowest point last week on day 38, placing them in their timing band for a daily cycle low. Thursday the Transports finally formed a swing low. They also closed above the declining trend line and are beginning to turn the day 10 MA higher to confirm the new daily cycle.

The next roadblock for both stocks and the Transports we will be to close above the declining 50 day MA.

Potential Bullish Set Up

The daily equity cycle peaked on day 21. Stocks went on to close below the daily cycle trend line on Monday to confirm the daily cycle decline.

Monday was day 25 for the daily equity cycle, which was 5 days of being shy of the normal timing band for a daily cycle low. But since the previous cycle was a bit stretched at 58 days, we need to be aware of the possibility of a shortened daily cycle forming which would balance out the cycle counts.

Notice prior to the daily cycle peak on day 21 that stocks began to close above the upper daily cycle band. That indicates that stocks have begun a daily uptrend. So if stock can form a swing low above the lower daily cycle band then they will remain in their daily uptrend. And since the 10 day MA has aligned with the 50 day MA, a close above the 50 day MA would signal a new daily cycle.

“The Next Swing Low Could Be The Ticket”

Joerg commented today that the next swing low could be the ticket.
And I think that he is right.

The daily equity cycle peaked on day 21 which shifts the odds towards a right translated daily cycle formation. A right translated daily cycle formation forms higher highs and higher lows, which is the definition of an uptrend. So assuming a right translated daily cycle formation, then the next swing low presents the best buying opportunity for this intermediate cycle after the intermediate cycle low.

But what happens if stocks print a lower low?
I pose this question based on what I see happening with the DOW.

Unlike the S & P, the DOW peaked on day 11, which sets up a left translated daily cycle formation. And the DOW closed below the lower daily cycle band, which signals that the DOW is continuing its intermediate cycle decline.

If that is the case that the DOW is continuing its intermediate cycle decline to print a lower low then, by definition, that will extend the intermediate cycle low out to the upcoming daily cycle low.

So on the one hand if stocks form a higher low then the good news is that begins a pattern of higher highs and higher lows. Or if stock do print a lower low the good news is that stocks would probably be printing the final DCL of an extended intermediate cycle low.

So I believe Joerg is correct that the next swing low could be the ticket.

Status of the Daily Equity Cycle

Tonight I want to discuss the status of the daily equity cycle.

Stocks gapped higher over the 50 day MA last Friday. Stocks went on to print a new daily cycle high on Tuesday, day 21. A new high on day 21 begins to shift the odds towards a right translated daily cycle formation. However, stocks closed lower every day this week.
A break below the daily cycle trend line would confirm that stocks are declining into their daily cycle low.

Stocks could merely be filling the gap that was left behind on Friday. If so, then stocks should respond bullishly from the convergence of support from the 10 day MA and the daily cycle trend line. The 858 million Buying on Weakness from Tuesday & Wednesday favors a bullish response.

Bigger Picture

Tuesday was day 21 for the daily equity cycle. While stocks gave back some gains on Tuesday I believe that the bigger picture is bullish.

Buyers began to step in at the end of the day on Tuesday.

And there was a modest Buying on Weakness day as well.

And the bigger picture is that stocks are only on week 5 of the new intermediate cycle. And I believe that stocks are rallying out of their yearly cycle low. The first intermediate cycle out of the yearly cycle low should form as a right translated weekly cycle. And the previous to weekly cycles peaked at weeks 19 and 22 respectively. So I believe that this intermediate rally has only begun.