Corporate earnings are coming in very soft and the misses from many of the blue-chips and hot tech stocks is concerning. These come on the heels of lowered expectations; basically corporations are struggling to clear what is a “lowered bar”. I think this time around the market is beginning to respond to this weakness in earnings, as the idea of a business Cycle (Recessionary impact on earnings) rotation begins to gain traction.
In the midweek report I mentioned that I did not buy the bullish “3 White Soldiers” pattern because my Cycles were telling me that with a “4-1 Failure” on the cards and a deepening Cycle count, that move was more likely going to be a trap. The reversal came and in its wake has left behind a 3rd lower high which will be confirmed if point (4) on the chart below is taken out. There is no doubt now that the Daily Cycle is in decline for Equities. It’s lining up fairly well with the Gold Cycle and inversely with the Dollar Cycle. I just don’t see how we go higher now without first printing at least a DCL, likely within the next 5-15 days below point (4).
Equities have been hot for 3 years now, basically 5 straight Investor Cycles of disappointing the bears just when they thought they had the upper hand. It would not be surprising, in light of QE3, to see the coming decline here hold the 1,410-1,420 area, print a normal DCL, and then go off in a new powerful 4th Daily Cycle. This would stretch out the IC to week 25 and beyond, a level that has been consistent with past QE influenced Cycles.
From a sentiment standpoint, it would appear as if levels hit IC Highs and are now reversing with the Cycle. In the past whenever sentiment dropped this far from the upper bands, a move down to an ICL was normally underway.
The idea of a shallow ICL is also very well supported by the Weekly chart. Many of the elements and conditions seen during IC tops are now firmly in place. We have a 20 week Cycle count with a Week 17 Swing High, both perfectly in the timing bands. For the first time in 19 weeks, we have a breakdown of the IC trend-line. Sentiment is dropping from an elevated range and the Weekly RSI (5) is moving lower, tracking a path typical of a tail-ending Cycle. The Half Cycle failure and Left Translated nature of this Daily Cycle should be the “icing on the cake”, it points to a Cycle that will quickly fail, satisfying the requirements to also complete an ICL.
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