May 2004 – T Theory® Update
Short Range T Update May 28 2004
This week saw a Bullish Surprise in the blue volume Oscillator in the Updated Daily Chart below. Click on the image for a larger view.
The rise of the oscillator to new higher highs and a very high level historically is characteristic of an upturning trend and so this T may turn out to be bullish nature after collapsing initially. This is rare but possible. However the confirmation process needs to be worked out on the next pullback to be sure.
Remember any bullish T rally must see any and all future corrections hold at the 55 day MA. If in the days ahead this MA does not hold then the T is not bullish.
As to a strategy for any buying there is none for now because the volume oscillator is very overbought and a correction can be expected. The usual scenario can be seen at the very earlier of this chart coming out of the March 2003 low. After a momentum peak the conditions for buying the pullbacks are typically to see a 5 day correction that bring the oscillator down out of it overbought condition to the zero level and at the same time see the S&P come back to the 55 day MA but not break below.
As of this writing the S&P is not much above the 55 Day MA (1112) so it is possible that any near term top will see a breakdown leaving the T’s status as bearish. However if the rally continues for a few more days the S&P could get high enough to pullback but still hold the MA. Then the T may be bullish.
In any case the picture should resolve itself in a few more days.
Short Range T Update May 21 2004
This week I am interested in the Short Range T picture as it relates to the 39-week Adaptive Channel’s more general “big picture” conclusions. Click on the image for a larger view.
Last week I made the point that market corrections for the S&P 500 have historically produced only two outcomes after a peak has formed at the upper envelope in my Adaptive Envelope Chart. The critical division between the normal bull market correction of some roughly 10% from an overbought high or the more bearish, roughly 20%+ correction, will be whether the 39 week MA can hold in the weeks ahead.
So far the 39-week MA (currently at 1073) has held due to the short-term oversold condition, but the rebound so far doesn’t look particularly enthusiastic. I still expect this very long spanning Short Range T will let the market slide lower in its right side as it collapses under the pressures of negative fundamentals.
However the more important task over the next few weeks will be to see how the rebound from the oversold condition in the blue volume oscillator is progressing. Ultimately I will have to verify that the 55-day MA (currently at 1113) is providing upside resistance to whatever rally develops. If so, then the T will be reconfirmed as a bear type of T that collapses again from the next overbought condition.
Because this T has such a long time span (into September) the downside danger is that recoveries only set up prospects for new declines to lower lows. Over the long time allowed by this T, is it possible for selling to accelerate, and under worst case, to produce a panic sell-off. This doesn’t have to occur but the nature of this T is such that it can easily happen.
Adaptive Channel Update May 14 2004
This week I simply want to make the point that market corrections for the S&P 500 have historically produced only two outcomes after a peak has formed at the upper envelope in my Adaptive Envelope Chart. Click on the image for a larger view.
A decline to the 39-week Moving Average (MA) is the normal ongoing bull market outcome. Support at this key level is very common in long up trends but the actual bottoming process can push the S&P a bit below the MA so it is important to watch the action around the current S&P 1073 neutral level for signs of any bottoming that might suggest this modest decline outcome is taking place.
The more serious, but less common outcome, is the full decline from the upper envelope of my adaptive channels, colored red as a warning of a peak, then down through the 39-week MA to the lower projected oversold condition, colored green as a warning of a tradable low. This outcome is suggested by the nature of the Short Range T detailed last week.
The envelope theory that I have developed generally concludes that these two outcomes are the only two practical outcomes an investor need consider for say the next 6 to 12 month period. This may be an over simplification but it is the major point of my 30 years of research. We are getting close to the point where the market will decide the outcome based on its view of the fundamentals.
The major outcome for the future should be reliable and I might add a “non-biased” determination of whether or not the March 2003 low was an important turning for a new bull market or not. In general, a healthy ongoing bull market will not see the S&P break to the lower extreme. So, if the trend breaks down, unfolding then one should adopt a bear market strategy.
On the other hand, if the S&P can limp along at the 39-week MA then a normal bull market correction may be unfolding which has bullish implications for the next 6 to 12 months.
The market’s decision from this perspective should be forthcoming in the next few weeks.
Short Range T Update May 7 2004
The trend of the S&P continues to weaken despite the presence of a Short Range T. This implies we are in an ongoing correction mode that has some weeks to go before completion, so T Theory is targeting potential low points in the charts that follow. Please click on the chart for a larger image.
In the chart we see the updated status of the new Short Range T with its 55-day adaptive channels. The fact that the S&P has fallen below the 55 day MA suggests this T is of the bearish type and therefore will not support a rally in the right side, which extends quite some weeks ahead beyond this charts time limit.
These types of Ts are termed bearish because they allow a decline to persist through the T’s right side, which normally of course, should see a rally phase for as many weeks as the prior cash build up. The historical danger is that on occasion the bear T collapses into a severe decline. This is my main concern for the duration of this T.
So far the breakdown below the 55-day MA is slight, but bearish nevertheless. A further weakening would conclude that a declining trend will last for the better part of this T’s lifetime which extends into Fall. The short-term downside price target is basically the 39-week MA as per my prior updates and it remains a very constant 1072 as of now.
However, an alternate way to track this 39-week target is to simply recognize the short-term channel limit for the lower extreme (1085 for now) eventually amounts to the about same price level. This more detailed view provides better tools for verifying lows and will become important once a real oversold condition develops.
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