Time to update January’s long term forecast. The prediction for 2008 was for "weakness until around the end of March and then a strong recovery until the end of the year". You can read the original cycle analysis forecast here.

We’ve had the "weakness until around the end of March" with the Emini down 154 points since the beginning of January. We are now at Martin Armstrong’s 8.6 year cycle predicted minor low (22 March 2008) and a number of technical and sentiment indicators are suggesting a rally from here:

• Over-sold against Bonds with bullish divergence setup
• Extreme readings on Put Call Ratio, VIX and Investor Intelligence data
• Climactic selling volume showing capitulation by Main Street
• Commitment of Traders Oscillator starting to turn up
• Bond market started to rally 20 days ago, and
• Trend line break out of congestion to the upside

However, after this rally is over I think we will test this year’s low again and not see the "strong recovery until the end of the year" start until May. This is based on the 4 year Presidential cycle that typically bottoms around May and continuing professional bearishness.

Before going to the charts, here’s a recap of the 6 long term Emini cycles I track:

• 4 year Presidential cycle
• 8.6 year Martin Armstrong cycle (Princeton Economic Institute)
• 8, 9, 10 year Benner-Fibonacci cycle
• 10 year Larry Williams Decennial cycle
• 11 year Sunspot Activity cycle, and
• 16, 20, 20 year David Williams / Kondratiev cycle

And what they were saying for 2008:

• The 4 year Presidential cycle predicts weakness in the first half of the year, a bottom in May and then a recovery.
• Martin Armstrong’s 8.6 year cycle predicts a minor low around 22 March.
• Larry Williams Decennial cycle predicts a strong year after some initial weakness.
• The Benner-Fibonacci, Sunspot and David Williams / Kondratiev cycles have no signals for 2008.

Here are the charts with annotations.

Year to Date Performance (Emini daily)

Year to date we are down 154 points on the Emini (continuous contract).

Emini with Bond Market Valuation

The Bond market oscillator shows we are over-sold against bonds and have a bullish divergence pattern setup.

Put Call Ratio and VIX (daily)

Sentiment indicators are also showing over-sold with the Put Call Ratio, VIX and Investor Intelligence Bull / Bear Ratio at extremes.

Volume Climax (Emini Weekly)

And lastly, we have had climactic volume on the Emini weekly chart. This usually shows capitulation by the average investor as the professionals step in.

Commitment of Traders: Oscillator -47

A significant turning point could be approaching with the Commitment of Traders Oscillator beginning to turn up.

Bond Market with 20 day Delay

In addition, the Bond market made a significant low 20 days ago and there is typically a 20 day lag between bond market turning points and the Emini.

Trend Line Break (Emini daily)

And the Trend Line congestion zone has been tested on the downside and has now broken to the upside.

Commitment of Traders: Professionals -2.3% (short)

However, if we get a rally it may only be a technical, short covering one. The real rally may come later in May. The Professionals are still mildly bearish with short positions equivalent to 2.3% of open interest.

Seasonality (Emini weekly)

Although seasonality has not been working in the market’s favor this year, the end of March to the beginning of April is usually not good for the market. But in down years this pattern is not reliable – in 2001 the selling pressure just kept the market at its lows; in 2003 the market began its rally during this period.

Hilbert Sine Wave (Emini monthly)

Lastly, the long term (monthly) Hilbert Sine Wave has yet to make a cyclical low turning point. So we might test the lows again (around May) after a rally in the meantime.

Good luck with your Emini trading.

It’s fun and sometimes helpful to start the year looking at long term Emini cycles. I track 6 different long term cycles:

• 4 year Presidential cycle
• 8.6 year Martin Armstrong cycle (Princeton Economic Institute)
• 8, 9, 10 year Benner-Fibonacci cycle
• 10 year Larry Williams Decennial cycle
• 11 year Sunspot Activity cycle, and
• 16, 20, 20 year David Williams / Kondratiev cycle

Not all the cycles signal during any particular year. But what did they say would happen in 2007?

• The 4 year Presidential cycle said there would be a peak mid-year.
• Martin Armstrong’s 8.6 year cycle said there would be a major peak on 24 February.
• The Larry Williams Decennial cycle said there would be a peak mid-year, followed by a sharp decline.
• The David Williams / Kondratiev cycle said there would be a financial panic.

The chart below shows what actually happened to the Emini during 2007.

Emini 2007

On a continuous contract basis, we ended the year at almost the same level we started (1,485). We had an initial peak at the end of February, almost to the day that Martin Armstrong’s cycle predicted! Then rallied to new highs with a peak mid-year – as suggested by the Presidential and Decennial cycles.

This level was then tested and slightly surpassed in early October before sharp falls at the end of the year on sub-prime fears, large banking write-downs and even bank collapses. So the Decennial cycle prediction of a sharp decline was right, but who’d have thought that the David Williams prediction of "financial panic" would come true!

So what about 2008?

• The 4 year Presidential cycle predicts weakness in the first half of the year, a bottom mid-year and then a recovery.
• Martin Armstrong’s 8.6 year cycle predicts a minor low around 22 March.
• Larry Williams Decennial cycle predicts a strong year after some initial weakness.
• The Benner-Fibonacci, Sunspot and David Williams / Kondratiev cycles have no signals during 2008.

All together, it looks like the prediction for 2008 is for weakness until around the end of March and then a strong recovery until the end of the year.

Update: This article was updated in March 2008. Read the updated cycle analysis here.

A note of caution, I don’t trade using long term Emini cycles but it’s fun to do and I couldn’t help myself this year. Good luck with your trading.

The Emini closed up 2.25 points at 1,433.50 on Monday. Range was average today but volume was well below normal at only 0.8 million contracts traded. Having bounced off 1,418 to 1,424 at the end of last week the Emini is now getting ready for a breakout. The Composite Trend Oscillator suggests upwards.

The chart above shows my Composite Trend Oscillator on daily Emini bars. This oscillator is the combined reading of my 4 leading trend indicators: Trading Index TRIN Oscillator, Open to Close Oscillator, John Ehlers Hilbert Sine Wave and the Smart Money Oscillator.

The current reading on the oscillator is -209 and well into oversold territory. This usually signals a low turning point but needs a breakout for confirmation. Any sustained move above 1,436 would signal such a breakout.

Other confirming indicators of likely market strength are the positive Commitment of Traders reading and strong US Dollar versus Japanese Yen.

If we do get an upside breakout how far might it go? We already know that the 1,450 level will offer resistance. Also worth bearing in mind is that Bonds continue to fall and a rounded turning point lasting almost 10 trading days was reached in the Bond market 20 days ago. The Emini tends to lag the Bond market by about 20 days and so we might see a similar pattern with a slow, rounding turning point in the Emini. In addition, the Emini is overvalued against Bonds and the NASDAQ has been showing weakness versus the Dow over the last 3 days.

This is the first article in over a week. I have to be honest with you, I have been short since 16 March and was totally taken by surprise by the recent rally following the Fed announcement. As a result I have been sitting on a near 30% drawdown. In situations like these my objectivity is compromised and since readers of this website rely to some extent on my analysis I did not feel like posting any new articles. Apologies to all subscribers, I’m sure you understand.

My biggest fault trading is entering and reversing positions too early. This was certainly the case in the last two weeks. In some ways these experiences are good, as they force you to address your weaknesses and perfect the art of trading. However, I made excellent money shorting the first two legs down of the February correction and it hurts to have given a lot of this back. All may not be lost though. Below are a large number of charts – I hope they make it through to email subscribers.

The Emini chart below shows the recent action and the dilemma traders now face. The February correction left a gap between 1,452 and 1,460. We have come back up to test the 1,452 level and been turned back so far. Are we in the middle of a bullish continuation pattern that will see us bridge the gap (1,460) and test the February highs (1,475) OR will the rally fail and signal a more severe correction is under way?

The following analysis shows:

1. Bearish divergences in my major trend oscillators (Trading Index TRIN Oscillator, Open to Close Oscillator and Smart Money Oscillator). Remember all three of these oscillators use different market measures (TRIN data, open to close to open moves, direction of end of day trading) and are therefore non-correlated.
2. Commitment of Traders data is very bullish but may be reaching an overbought level. To be honest this is the most bullish of all my indicators.
3. The Emini is overvalued compared to Bond prices. In addition, turning points in the Emini typically follow Bond prices with a lag of 20 days – and we are now approaching one of those downward turning points.
4. A "Complete" pattern (breakout -> pullback -> exhaustion) is about to form on Emini 45 minute bars with an "Exhaustion" pattern on daily bars. However, we are still a couple of days away from similar exhaustion patterns forming on 81 and 135 minute charts.
5. The last top formed around the 1,452 level was on low volume and created a "No Demand" pattern.
6. The upward trend line from the low at 1,375 was broken today at the 1,440 level.
7. There may be some "window dressing" going on as the first quarter ends this week. Next week sees the beginning of Easter and markets tend to be strong going into holidays. Seasonally, mid April is a weak period for the markets, some analysts have suggested US citizens are cashing in to pay taxes (15 April).
   
8. Lastly, the US$ is weakening against the Yen (and other currencies) indicating overseas investors moving money out of US markets.

In summary, I continue to be bearish but we may still be a couple of days away from a downward turning point. If you are long, move stops up. Check out the charts below.

The chart above shows bearish divergence on the Trading Index (TRIN) Oscillator.

The chart above again shows bearish divergence, but this time on the Open-to-Close Oscillator.

The chart above again shows bearish divergence, but this time on the Smart Money Oscillator.

The chart above shows the Commitment of Traders. The raw reading is very bullish at +3.3%. The COT Oscillator is moving up from oversold to overbought.

The chart above shows Emini valuation against Bonds (SPY vs. iShares 20+Yr Bonds). This oscillator has reached overbought territory but it can remain overbought for prolonged periods of time.

The chart above shows 30 Year Treasury Bonds price action over the last 6 months. I have found Emini turning points tend to lag the Bond market by approximately 20 days. We are coming up to a slow rounded turning point in Bonds 20 days ago.

Lastly, the chart above shows John Ehlers Hilbert Sine Wave about to make a "Complete" pattern. I know this is a complex chart and apologize for that. Trend moves typically follow a pattern of breakout, pull back and finish with exhaustion. We’re about to get the exhaustion cross over on 45 minute bars.

Good luck Emini trading over the next few days.

Mixed signals today. The Emini closed up 0.75 points at 1,384.75 on Friday. We got the bounce expected after Thursday’s close but trading was very light because of the Veteran’s Holiday. We now have a mixed bag of signals. Check them out below.

The Emini opened barely changed at 1,383.50, briefly rallied to 1,385.50 and then fell to the low of the day at 1,379.25. At this point the buyers took over and pushed the index higher, closing above the open and above yesterday’s close at 1,384.75. Volume was very light at 0.8 million contracts traded and range was well below average at 6.25 points. We now have a double bottom put in at 1,380 and resistance at 1,394. Consider the market range bound until these levels are broken.

OK, so here’s what I mean by a mixed bag. On the negative side:

1. My Secret #2 oscillator, based on the open and close prices, turned down today (see the chart above)
2. Trading Index (TRIN) oscillator also turned down today
3. We have divergence on the Trading Index (TRIN) with the market up but the index down

On the positive side:

1. My Secret #3 oscillator, based on Smart Money, is over-bought but has not turned down yet
2. The NASDAQ futures rose while the DOW futures fell, a bullish divergence
3. The Emini tested 1,380 and churned, with volume relatively high considering the small range

Personally, I hate reading market commentaries where the analyst covers themselves and ends up being "right" whichever way the market trades. So I’ll stick my neck out – I have a bullish or long bias. And here’s why.

I got really depressed on the weekend reading all these blogs and economists telling me how bad the economy was, how bad real estate was, how many people were quitting Silicon Valley – it went on and on. Yes, I know we have an inverted yield curve, that 2007 is going to be rough, house prices are falling, etc. But that won’t help me trade on Monday and Tuesday. Mixed bag of signals, yes, but my trend oscillators always turn early – they’re leading indicators – and the volume churn was a significant sign. The trend always lasts longer than you think – and we’re in an uptrend until proven otherwise. Looks like we’ll re-test the 1,394 level to me – let’s see after Monday or Tuesday.