The Harley Market Letter - November 21, 2008

November 21, 2008

Vol. 11, No. 07

Advanced Technical Analysis of the Financial Markets

STOCK MARKET 7,500 Dow Support; 750 S&P Support Four and a half years of bull market wiped out in one year. A precipitous decline to be sure. The charts of the Dow Industrials and the S&P 500 show that price declines in these two indices have fallen to the 7,500 and 750 levels respectively. These are MAJOR price octaves in my work and are likely to be supportive for the overall market in my opinion. I note that these zones of support contained the 2002-2003 bear market lows as well. The NASDAQ Composite has fallen to just below its 0.786 fibonacci support line but is likely to rebound quite smartly back above that threshold in the near-term.

7,500 Price Octave Major Support

The Harley Market Letter and Update Service are published by Harley Capital Management, P.O. Box 1062, Thousand Oaks, CA. 91358-0062, telephone 805-558-3590, website: www.harleymarketletter.com, e-mail [email protected]. Copyright © 2008. All rights reserved. No copying, reproduction, or electronic transmission may be made without written permission. All trading and investment decisions are the sole responsibility of the subscriber. Clients and principals of Harley Capital Management may have positions in the markets reviewed.

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0.786 Retracement

S&P 500 Cash Index 0

377 Trading Days (TDs)

11-Oct-07 High

31-Oct-07 High -20

226 (233) TDs

19-May-08 High -40

187 (188.5) TDs

13-Apr-09 / 01-May-09 108 TD Low 377 TD / 78 Week Low

-60

21-Nov-08L 44 Week Low

-80

26-Nov-07L 108 TDs 17-Mar-08L

-100

01-Oct-07

23-Jan-08

14-May-08 144%R

15-Jul-08L 04-Sep-08 20% S.F.

24-Dec-08

20-Apr-09

4% S.F.

On the time-side of the analysis equation, I believe we probably hit a momentum low today and are likely to see some modest buoyancy in the short term. Readers may recall a cycle that I identified as being 107-108 TDs last year that marked the August 2007 and January 2008 lows. That 107-108 TD cycle is actually the half-span harmonic of a periodic function that averages 213 trading days or 44 weeks. I’ve traced this cycle back to the 08-Oct-1998 low point. This cycle has been quite regular in its beat. The chart on page 1 shows that the occurrences of this cycle have – in all but one instance – marked low points in the stock market. The troughs depicted in the chart show that although this cycle has coincided with important market turns, most of the inflection points have not been the terminal points in a move. For that reason, I am inclined to believe the move out of today’s low is likely to be akin to the move out of the December 31, 2002 (or October 10, 2002) low. Those lows preceded the 12Mar-03 cycle bottom by 54 and 108 trading days (TDs) respectively. It’s my theory that today’s 44 week cycle low is likely to precede the final cycle bottom in the current bear market by 108 TDs. Indeed, I don’t look for any significant price expansion until a host of cycles come together next April / May. The April 13 – May 01, 2009 time period looks very interesting from a cyclical perspective for the next bull market to begin. S&P 500 Cash Index

10

5

0

-5

-10

-15

-20

84.6 TD Cycles -25

13-Jun-07

29-Aug-07

14-Nov-07

04-Feb-08

7 Day Velocity

2

04/22/2008 14 Day Velocity

09-Jul-08

24-Sep-08

18 Day Velocity

10-Dec-08

Fibonacci Number 377 Appears to be the Dominant Factor in Defining Most Market Cycles Those of you that have followed my work for some time are well-aware of my premise that the Fibonacci number 377 seems to be the dominant factor in defining most market cycles. I have found 377 unit cycles to exist across the spectrum of time frames on yearly, monthly, weekly, daily, hourly and even five-minute charts. If there is a magic number in the markets, it most definitely is the number 377. These 377 unit cycles – like all market cycles – contract and expand like an accordion. Although I’m pressed to define some hard-and-fast variance parameters, a 377 unit cycle typically spans 288 – 466 time units (377 +/- 89 units). If a 377 unit cycle contracts within the current phase, the next phase usually expands so that the summed length of two consecutive cycles comes very close to 754 time units. Occasionally it takes three occurrences of the cycle to bring the beat back to its predicted point, in which case the total time span of the three 377 unit cycles comes very close to 1,131 time units. Thereafter, the rhythm resumes its trough-to-trough sequence very close to its predicted point.

May 26, 1970 Anchor Point Through trial and error I found that the low that occurred back on May 26, 1970 is one that has significance for this cycle. I call this significant point - which provides the best least-squares fit to the cyclical data - the anchor point. Indeed, the 377 TD cycles projected from that May 26, 1970 date have punctuated every single intermediate turn of importance – mainly lows – until recently. I have pinpointed 25 distinct occurrences of this 377 TD rhythm emanating from that 26-May-70L. 377 X 25 = 9,425 TDs; 26-May-70L + 9,425 TDs falls exactly on October 11, 2007. Those same 9,425 trading days spanned a total of 1,950 weeks – producing a net average of 78.0 weeks.

Brazil Bovespa Index

The chart above also highlights my premise that cycle lows should moreproperly thought of as the point in time to expect cyclical change – not necessarily the priceextremes in a given move. If the pattern in this cycle continues – and I do believe it will – we should look for the next occurrence in this 377 TD / 78 week cycle for the April 13 – May 01, 2009 time period.

U.K. FTSE-100 Index

3

NASDAQ Comp. vs. DJIA 400

6

5 300

3

Thousands

200

NASDAQ Comp. (Red)

DJIA (Green)

4

2 100 1

NASDAQ 1999-2009

02/06/2009

06/25/2008

11/09/2007

03/30/2007

08/15/2006

12/30/2005

05/19/2005

10/06/2004

02/24/2004

07/11/2003

11/25/2002

04/16/2002

08/24/2001

01/11/2001

05/31/2000

0

10/18/1999

0

DJIA 1929-1939

NASDAQ Juxtapositions with the Dow Industrials and Nikkei 225 This is an update from the two graphs I showed in the October issue. The tops are aligned so as to be coincident, with the evolving structure demonstrating remarkable duplicity. Indeed, the October 2007 highs occurred virtually right on schedule. The magnitude as well as the timing of the turns continue to parallel the prior occurrences in both the Dow Industrials and the Nikkei 225. They both argue the potential for a pending turn.

NASDAQ Comp. vs. Nikkei-225 45

6

40 5

2 20

1

15

NASDAQ 1999-2009

Nikkei-225 1989-1999

4

02/06/2009

06/25/2008

11/09/2007

03/30/2007

08/15/2006

12/30/2005

05/19/2005

10/06/2004

02/24/2004

07/11/2003

11/25/2002

04/16/2002

08/24/2001

01/11/2001

0

05/31/2000

10

Thousands

3 25

10/18/1999

Thousands

NIKKEI-225 (Green)

4

30

NASDAQ Comp. (Red)

35

323.1 Week / “Six-Year” Cycles Probably the most dominant – and most reliable – of all the long-term cycles that I track is a 215.4 week or “four-year” cycle. I have found that the June 13, 1949 low point has provided what I call the “anchor point” from which I project the 215.4 week recurring market rhythm. The black triangles at the bottom of the center graph reflect the 215.4 week successive beats from that 1949 low point. Notice how precisely this has defined most of the bottoms of the last 20 years. This cycle – like all market cycles – contracts and expands over time. The regularity of the pattern over the last 20 years has been quite remarkable. Indeed, the low on March 12, 2003 came virtually right on schedule.

S&P 500 Weekly 0

-20

09-DEC-94L -40

08-OCT-98L 08-Oct-98L

09-Dec-94L

11-Oct-90L -60

-80

12-MAR-03L 12-Mar-03L -100

03/09/1990

01/07/1994 144%R

11/07/1997

144%R 20% S.F.

09/07/2001 144%R 2% S.F.

07/08/2005 Proj 215.4 Week Cycle Low

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05/08/2009

However, comma, as I like to say, a twenty year look-back is not sufficient to assess the degree of variance in this cycle. Through trial and error, I recently found that a close examination of every three occurrences in this 215.4 week rhythm produced some interesting results. Indeed, if I take each third occurrence (215.4 weeks X 3 = 646.3 weeks) and divide that quantity by two (646.3 weeks / 2 = 323.1 weeks) an interesting pattern emerges (chart at bottom of page). Note how this cyclical rhythm (approximately six years) picks up a number of significant market turns. The linear scaling detracts a bit from the magnitude of those cyclical low points, so I will highlight a number of them over the last 30 years: 03-Mar-1978L, 24-Jul1984L, 11-Oct-1990L, 07-Jul-1996L, and 12-Mar-2003L. The next occurrence in this rhythm – by my calculations – is due in the May 01, 2009 time period. That’s very interesting, indeed. May 1st is exactly 108 TDs from today (November 21, 2008). I also have my next 377 TD / 78 week cycle targeted for April 13, 2009. In summary, I would expect we’ll see some modest buoyancy in this market in the short term. But I don’t look for any serious price expansion in equity prices until next April / May 2009.

U.S. Treasury Bonds 115’20 Price Octave

108 TD Cycles Derivation: 377 X 2 / 7 = 108

For some time bonds have maintained a contra-cyclical effect with the equity markets. As stocks have fallen, bond prices have risen, and vice versa. The 108 TD cyclical function I have overlayed on the chart at left lines up with cyclical high points in the bonds – as well as cyclical low points in the stock market. The bond market is – to put it mildly – excessively overbought. The panic buying this week may well turn out to reflect an “island reversal” on the charts. This fact – coupled with the arrival date of this 108 TD cyclical function – leads me to believe that bonds are ripe for a sharp pullback beginning right away. It would not surprise me at all to see a rapid retracement back down to the 115 20/32nds line once again.

************************************************* PRECIOUS METALS Since topping out on March 18th, gold traded on the Comex has continued to make a series of lower highs, lower lows. It’s my view that the metals complex has seen its bull market top and we are now in a bear market decline that could last two-three years.

750 Price Octave Support

7,500 for the Dow, 750 for the S&P, 750 for Comex gold. Sound familiar? At any rate, it would appear that gold has found short-term support at its 750 price octave. But I view any rally from here as counter-trend in nature. My next 69.2 TD cycle is due right around the end of December. I wouldn’t be surprised to see the metals hold up until that date, with the next occurrence in this cycle marking the high-point reversal – from what-ever price point that occurs. Next floor of support on the way down: 625. The XAU would appear to have found short-term support at its 75 price octave. In the rebound, I look for this index to push back at least to its 100 price octave – then reverse back to the downside.

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