Cycle Deep Dive

At times, it seems there are as many cycles as there are traders. I have been focusing on the shorter-term ones, those ranging from 2 to 5 years.

Recently, I pondered on the clear fact that cycle forecasts work far better to spot market bottoms than tops. Do we need different math models for tops? Perhaps, so I have started working on that.

In the meantime, I began looking for longer-term cycles to help, and tumbled into something I had never seen before... the existence of an 8.7-year wave. Here it is.

Chart 1: DJIA 8.7-Year Wave

As we see in Chart 1, this wave provided an early warning for the 2022 top. Since then, the Dow Jones has mimicked the wave pattern. Of particular interest to me is that, just like with my shorter cycle work, this one is telling us to prepare for an advance to begin in mid-September. 12 of the 15 times this pattern has appeared, it has been very bullish... 80% of the time. More confirmation of what we have been looking for.

Shown next are the three times the wave was not successful. These give us more insight into what may happen and how we can respond.

Chart 2: DJIA 8.7-Year Wave 2006

Chart 3: DJIA 8.7-Year Wave 1998

Chart 4: DJIA 8.7-Year Wave 1972

Taxes, Recessions, and Reality

Several economists are saying we are, or shortly will be, in a recession, based on the decline in Federal Tax Receipts.

Chart 5 is from the FED, which appears to show that recessions correlate highly with taxes not coming into the Treasury. As a reminder, the grey vertical areas are periods of recessions.

Chart 5: Fed Government Tax Receipts 1950-2020

To get a better view of the relationship, Chart 6 gives an up close and personal view of the data from the late 1940s into the early 1960s.

Chart 6: Fed Government Tax Receipts 1948-1963

Looks pretty convincing, doesn't it? So, is it that we are about to enter a recession/bear market?

Well, anything is possible. Yet there is another way of looking at the data that, to me, suggests there is more to this than the above charts show.

Taxes are a Follower, Not a Leader...

Now we look at what I think is the truth of the matter, one that makes more sense. The bears are saying a downturn in receipts shows the economy has turned down. I agree. But it would be more important, it seems, to find the driving force of receipts. After all, the data above is released each quarter, so there is a delay of consequence here.

To me, the best forecast of Tax Receipts is... the stock market. This makes more sense; stocks rally when business is good, and good business means more tax money flowing to Uncle Sam.

Chart 7: DJIA vs. Tax Receipts

Here's the proof. In Chart 7, I have overlaid the Dow (in red) vs. Receipts, and pushed the Dow forward 4 months. As such, it has been as good as it gets in the world of forecasting to predict the flow of tax funds. Currently, stocks have been rallying, telling us receipts will be picking up again. As I see it... receipts are not forecasting a recession. Stocks forecast receipts, not the other way around. Keep breathing, and the economy will continue muddling forward.

The Significance of the Decline in Inflation

The best economic news of 2023 is the peak in inflation. It has topped out, no two ways about that, and is on schedule with the downturn predicted last year.

Today, I want to focus on what have peaks in inflation meant in the past -- if anything.

To arrive at some idea of what the abatement of inflation means, I am sharing the standard 12-month rate of change in the CPI, posted with the Dow Jones Average, to see if there are lessons from the past to guide us into the future.

Chart 8: DJIA vs. Inflation 1965-1990

Chart 8 begins in 1964 and ends in 1990. This was a time of three distinct increases, then declines, in the CPI data. It looks to me like peaks in inflation have heralded in big bull markets that lasted until inflation turned back up. For over a quarter of a century, that appears to have been the pattern.

Have we found something here? What do the ensuing years teach us? Let's look and learn.

Chart 9: DJIA vs. Inflation 1985-2008

What I see is the same pattern... a peak in inflation kicks off major stock market rallies. The 2000 peak is the only exception over 40 years and 9 inflation bubbles.

Let's finish this off with where we are now.

Chart 10: DJIA vs. Inflation 2002-2023

I don't know what you believe, but, speaking for myself, I believe inflation peaks (like we have just had) are very positive for stocks. Not just Positive for this week or month... but positive for a long time. Positive until inflation begins to rise again. This data suggests there is plenty of life left in the bull.

Fantasticks and September

The longest running play on/off Broadway was The Fantasticks. The play (well worth seeing) leads off with the Tom Jones song, "Try to Remember". The lead line, "Try to remember that time in September" may well have been written about the stock market!

Here's why; since the play opened in 1960, September has usually seen a spirited decline close to the end of the month. You don't need a playbill for this, just the data I am sharing here. The first clip shows the results of selling on the Xth trading day left in September over the last 25 years.

Table 1: S&P 500 E-minis 10 TDLM

Selling on the opening of the tenth trading day left in the month has been the best, with a heady 92% win-rate using a quick exit. But does the trade have legs to it? That is answered by Table 2.

Table 2: S&P 500 E-minis 10 TDLM Best Hold Test

I tested the days to hold from one day to 12. Yes, it has legs. A nine-day hold was the best in terms of dollars won, but accuracy dropped. Using a 4-day hold looks like the best, making almost as much, $37,287, while keeping that 92% win-rate.

In these tests, I used a $2,500 stop loss. Is there a better stop?

Table 3: S&P 500 E-minis 10 TDLM Stop Loss Test

The answer is "not really". Sure, the $2,400 stop makes $200 more than the original stop I tested. Both, as they say, are good enough for government work or short-term traders.

Chart 11: 10 Trading Days Left in the Month of September 2022

Chart 11 is last year's trade, with my True Seasonal in blue. This can give you a better feel of what has taken place in the past. Just go look at your charts and compare them with the table(s).

Finally, Chart 12 is the trade setup for 2023, with our Seasonal superimposed.

Chart 12: September Seasonal

Long-Term Market Timing

Based on my cycle and fundamental studies, we are still in a bull market, and should remain so until at least late next year. I expect to see new highs.

Intermediate-Term Market Timing

With patience, I have been waiting for a market-buying opportunity in mid-to-late-September of this year. Here is an update on the current forecast. I fully expect stocks will follow the wave pattern seen here.

Chart 13: Pattern Stocks Should Follow

More importantly, we see a strong bias; since the 1880s, this wave has been profitable 70% of the time. Can I predict the exact day? I doubt it, but let's look at a few things that may help.

Stocks usually bottom on a Tuesday, and thus the 12th, 19th, and 26th are prime candidates. My hunch is a low on the 11th/12th with a bounce. Another excellent entry should be on about the 26th (as time runs out on a short-term sell you just read about).

What are You Waiting For, Larry?

Chart 14: Valuation and Stocks

In Chart 14, we see the SPY vs. our Valuation Model in StockCharts. I have marked off each time the index has entered the undervalued zone. Its record is exemplary, considering this uses weekly data.

Chart 14 ends in 2021, so let's bring this 7-year window up to date.

Chart 15: Current Valuation

Here it is. Its ability to call very good buying points (even in uptrends as in the middle of 2021) has held up. Hence, those with patience will wait for the index to dip into the undervalued zone.

Focus On Specific Stocks

First, a Word on Entries...

I can help you in stock selection and market timing, but will bypass specific entries. In the past when I have given an exact entry point, everyone piled on. The results were not good; lots of slippage and an immediate move against our position as specialists adjusted their book.

What you should be looking for when price enters our buy area is to see a trend change to the upside. This might be:

1) Rising above a recent trend line

2) Getting above an X day moving average

3) Taking out the highest high of the last X days, usually 12-to-17

4) Students will most often use my WillStop or Willtrend tools

5) Other entry techniques you know and have used.

This Will Help You ...

I like to buy stocks that have been stronger than the general market averages. What do I mean by that, and how do I do it? Let's use the chart below to illustrate my points.

Chart 16: Comparative Strength

In red, you can see that the QQQ has been a good representation of what stocks on the NASDQ have been doing. Underneath that, I am showing some today's favorite "hot stocks". We can compare these to the average (QQQ).

I have drawn a green horizontal line across to the QQQ's June's low; we recently dropped back to that point. However, look at CRWD, NVDA, and DKNG. NVDA did not come even close to the June low; it was comparatively stronger. CRWD has matched the averages, while DKNG held above.

As we approach a buy point in September, you can apply this same thinking to whatever stocks you are following.

Speaking of DraftKings Inc. (DKNG)...

Chart 17: DraftKings Cycle

Chart 17 is my rally projection for DraftKings. Makes sense; they are a modern-day bookie, and the big betting for football has just begun.

Nvidia Corp. (NVDA)

Chart 18: NVIDIA Cycle

This has been a wild one, and I don't think that will change yet. The uptrend should continue starting in early September, with a strong rally leading into November.

Apple Inc. (AAPL)

Chart 19: Apple Cycle

Apple is the kingpin stock and will remain so, as I see it. My studies suggest it's about time for a rally. The stock bounced well recently. Typically, important downtrend reversals in AAPL have been falling below the lowest low of the last 11 days. Going above the highest high of the last 11 days has been the buy. Lots of professional buying last week.

Rockwell Automation, Inc. (ROK)

Chart 20: Rockwell Cycle

ROK is a very good long-term hold. Cycles are bullish here, and there is a gap to draw price back to the 325 area. Look for the formation of a higher short-term low and/or downtrend line for entry possibilities.

CrowdStrike Holdings, Inc. (CRWD)

Chart 21: Crowdstrike Cycle

Cycles have worked well in this one. Earlier in the year, I did a forecast for one of Wall Street's heavy hitters that projected a rally at the end of June... just as it took place. Now I am looking for another rally. Chartists will note OBV has been very bullish here.

Walmart Inc. (WMT)

I have been intrigued by Walmart. It has been stronger, resisting the recent decline much better than its upscale counterpart Costco. Admittedly, the best seasonal time to buy this one is the first week in October. This year, WMT has been stronger than the seasonal pattern. So let's see what cycles are telling us.

Chart 22: Walmart with 120-Day Cycle

My study of the world's greatest retailer shows a 120-day cycle has been the most operative in this stock, as seen in this most recent chart. The next chart shows the consistency of the pattern back to 2021.

Chart 23: Walmart with 120-Day Cycle

Look to position Walmart stock this month.

ServiceNow, Inc. (NOW) and Adobe Inc. (ADBE)

There are two more stocks poised to rally in September, NOW and ADBE. Here are the charts with cycle projections.

Chart 24: ServiceNow CycleChart 25: Adobe Cycle

Closing Comments...

Well, well... we are through our first two months of this letter! I hope you enjoyed, learned, and profited from it.

Starting in October, it will no longer be free. So it's time for you to decide if you want to keep me working for you. I will still do some free stuff for you with StockCharts, but only occasionally. I want to focus my energy on this letter and our live monthly meetings.

The free trial ends October 1, 2023. To sign up, please visit https://www.stockcharts.com/larry

With my wishes to you for good luck and good trading,

Larry

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If you have questions for Larry that you'd like addressed in future postings, please email familygathering@stockcharts.com.

Novice investors usually go on a "Holy Grail quest" early on, reading books and watching videos and searching for that elusive one indicator to rule them all. After 23 years of analyzing the markets using technical analysis, I will tell you one thing for sure...

There is no Holy Grail.

What I will also tell you is that there are a number of technical indicators that do a very good job of helping the astute investor to analyze trends, quantify investor sentiment, and anticipate inflection points in price.

One of my favorite indicators to do all of the above is the Relative Strength Index, or RSI. Created by Welles Wilder and promoted in his classic text New Concepts in Technical Trading Systems (featured in our Recommended Reading List!), the RSI has become my go-to oscillator to better understand price dynamics.

Today, I'll show three ways that I use the RSI to identify short-term price swings, determine trend phases, and anticipate market turns.

Overbought vs. Oversold

When I was first introduced to technical indicators, I was kindly asked (that is, forced) to prove out the calculations to about 20 indicators in Excel. The idea was that, by understanding the math behind each indicator, I could better understand how it was using inputs of price and/or volume and how the output could be used to anticipate turning points.

Wilder originally designed RSI for the commodity markets, and for him it was all about mean reversion. In other words, the goal was to buy low and sell high, and RSI was a tool to try and optimize those entry and exit points.

The chart of gold miners has plenty of examples of where overbought conditions were followed by short-term drops, and oversold conditions usually happen right before a bounce higher. To be clear, the real signal is not when the indicator enters the overbought/oversold region, but rather where it exits that extreme condition.

Buy signals in February, May, and August 2023 all worked quite well, as gold stocks bounced higher in each instance. Sell signals in January and April 2023 also worked out, with price pulling back in both cases.

Sometimes, those extreme readings become a little more complex, and we need to add divergences to our technical analysis arsenal.

The Dreaded Bearish Divergence

It makes sense that, when a stock is an uptrend, the RSI will tend to get to the overbought region. Price is going higher, driven by stronger upside momentum, so an overbought condition should be expected. So when the price continues higher not on stronger momentum, but weaker momentum, that's when we may need to take action.

Notice how Apple made higher highs every month from January to July? Now focus on the highs in late June and mid-July. The price of AAPL continued to grind higher, but the RSI actually sloped lower. This pattern of higher prices and lower momentum is called a bearish momentum divergence and usually indicates a bullish phase that is "running out of gas". In other words, the end of the trend is near!

We noticed bearish divergences on key growth stocks back in July, which meant the subsequent drop in August was a likely next step for the markets. But how can we relate short-term RSI signals to long-term trends? This is where Connie Brown's work completely changed how I use the Relative Strength Index.

Using RSI to Determine Trend Phases

The above example using gold stocks provided a decent illustration of overbought and oversold conditions. But sometimes the RSI never gets to an extreme reading. Does that mean the indicator is broken? No, it means the price is trending.

In Connie Brown's groundbreaking book, Technical Analysis for the Trading Professional (another book featured in our Recommended Reading List!), she explains how the range shown by the RSI over time can tell you about the overall trend structure.

When a chart is in a confirmed downtrend of lower highs and lower lows, the RSI often becomes oversold on the downswings. But the countertrend moves back to the upside usually stall out with an RSI around 60. You'll see the opposite in an uptrend, where the RSI often becomes overbought on a move higher, but rarely breaks below 40 on pullbacks.

Here's that same chart of GOOGL but with the phases indicated with a shaded RSI.

Through the end of 2022, Alphabet was in a clear downtrend phase. The fact the RSI never really broke above 60 on upswings tells us that, while we are seeing some countertrend bounces, the overall trend remains bearish. Note how the pattern changes in January 2023, with the RSI pushing up to 70 on a rally. This was an early indication that something had changed and that the overall downtrend phase was evolving into a new uptrend phase.

As long as GOOGL becomes overbought on upswings, and the RSI remains above 40 on pullbacks, the RSI is telling us that the overall trend remains bullish.

I've found the Relative Strength Index to be an effective way of anticipating turning points, recognizing trend shifts, and confirming market phases. By applying indicators like RSI in a consistent and disciplined manner, an astute investor can use price momentum to better identify entry and exit points in any market environment.

RR#6,

Dave

P.S. Ready to upgrade your investment process? Check out my free behavioral investing course!

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David Keller, CMT

Chief Market Strategist

StockCharts.com

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Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

The author does not have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.

ADVANCE-DECLINE LINE BOUNCING... A glance at various measures of market breadth offers good and bad news. All of them are lagging behind the S&P 500 which is a caution sign. The good news is that they're bouncing off potential support lines. Chart 1 compares the S&P 500 (black bars) to the NYSE Common Stock Only Advance-Decline Line (red line) over the last nine months. It shows the red line falling more than the SPX during August. But it also shows the red line bouncing off its 200-day moving average (red arrow) and trading back above its blue 50-day moving average. On a longer range basis, the chart also shows the AD line still trading well below its February high, while the SPX has exceeded that earlier peak. So while the short-term trend may be improving, the longer-term trend is still of some concern.

Chart 1

S&P 500 STOCKS ABOVE MOVING AVERAGE LINES... Chart 2 shows the percent of S&P 500 stocks above their 50-day moving average falling all the way to its June low during August which reflects weakness in the broader market. But it is bouncing off that potential support level from an oversold condition. It still has a long way to go, however, before it regains its own moving average lines. Only 47% of SPX stocks are now above their 50-day line.

Chart 3 shows the % of SPX stocks above their 200-day average falling during August to its current reading at 58%. [That means that 42% of SPX stocks are still below their 200-day average]. There again, however, the red line is bouncing from an oversold condition. But it remains below its own moving average lines.

Chart 2

Chart 3

SMALL CAPS CONTINUE TO LAG BEHIND... Previous messages on market breadth have pointed out that most of the weakness in the broader market has beeen seen in smaller stocks (which include midcaps). And that's still the case. The daily price bars in Chart 4 show the Russell 2000 iShares (IWM) bouncing off chart support along its June low and its 200-day moving average while in a short-term oversold condition. On a longer-term basis, however, the inability of the IWM to exceed its February peak casts some doubt on the strength of the broader stock market.

Chart 4

BONDS TEST PREVIOUS SUPPORT... Rising bond yields are one of the factors pressuring stocks during August. My previous message showed the 10-Year Treasury yield testing its previous high formed last October. A pullback in bond yields has probably contributed to this week's rebound in stocks. And has caused a rebound in bond prices. Chart 5 shows the 20 Year Treasury Bond iShares (TLT) finding some support along its October-November lows while in an oversold condition. The chart carries important longer-range implications. Higher bond price imply lower bond yields which would be good for stocks. Lower bond prices, however, and higher yields could have a more negative impact on stock prices.

Chart 5

Last week, the broader markets regained their uptrend, with the S&P 500 and Nasdaq Indexes both closing above their key 50-day moving averages on Tuesday. In addition, the RSI and Stochastics turned positive as well. This price action indicates that the 3-week pullback which began in late July has been reversed.

The biggest winners last week were growth stocks, which had tumbled the most amid a rising interest rate environment that began in late July. Rising rates are negative for growth stocks, as they reduce the value of future earnings.

DAILY CHART OF S&P 500 INDEX

Rates pushed lower last week as investors regained optimism that the Federal Reserve will continue to pause their rate hike campaign. The shift occurred due to weaker-than-expected economic and inflation data. Technology stocks were the biggest winners, with recently weak Semiconductor and Software stocks rallying an average of 5% last week. A rally in heavyweight stock Apple (AAPL) also gave the Indices a boost. Last week's rally in AAPL occurred amid investors' optimism surrounding the company's iPhone 15 release, which is expected on the 12th of this month. While the chart is in a bullish position from which to trade higher, September tends to be a poor month for Apple, with shares falling more than half of the time following a bullish run up into their product releases.

DAILY CHART OF APPLE (AAPL)

A better option might be to take advantage of the move back into Homebuilding stocks, which regained their uptrend after declining rates pushed mortgages lower. Sales of new U.S. single-family homes rose in July, as an acute shortage of existing homes drove buyers to new units. This shortage of properties offset the impact of high mortgage rates in July that had dampened demand in prior months. Below is a chart of the S&P Homebuilders ETF (XHB), which points to further near-term upside for this group.

DAILY CHART OF S&P HOMEBUILDERS ETF (XHB)

Last week's impactful economic data provided plenty of fuel for the markets, as weak reports were viewed as a positive amid receding fears of further rate hikes. Next week, the economic calendar is very light, which may leave room for a reinterpretation of the Fed's possible action at their next meeting later this month. In the chart of the S&P 500 above, we've highlighted key areas of near-term support and resistance.

For those who'd like to be kept up to date on market sentiment as well as be alerted to new stock candidates as they're added to my twice-weekly MEM Edge Report, use this link here to receive immediate access to recent reports, as well as this Monday's new report. Subscribers were alerted to the market's new uptrend on Tuesday, where we added two new stocks to the Suggested Holdings List. These high-quality growth stocks were in the Software and Semiconductor groups, which have also just recently regained their uptrend.

 

Enjoy the long weekend!

Mary Ellen McGonagle, MEM Investment Research

Traders and investors pay a lot of attention to surveys to assess swings in sentiment, but watching what people do with their money can often be just as informative, if not more so. The idea is to compare the performance of a risky asset with a more conservative one. When the risk-on part of the equation outperforms its risk-off counterpart, it reflects confidence in the economy and vice versa. Higher equity prices usually follow.

These relationships are also subject to negative and positive divergences. For example, if a new high is achieved by the S&P 500 index ($SPX) and it remains unconfirmed by the ratio, a subtle indication is given that the quality of the rally is deteriorating. Positive divergences, while less common, have a similar but opposite effect.

Examples of Divergences

A couple of examples of negative divergences in action are shown in Chart 1, comparing the S&P 500 to a ratio between the riskier Fidelity Capital and Income fund (FAGIX) to the more defensive Vanguard Long-Term Treasury fund (USMF). The first example developed in 2020, when the ratio peaked ahead of the S&P 500. The second developed throughout 2021 and took longer to evolve. It was eventually confirmed by a break in the 2020–2022 up trendline early in 2023. It's currently taking on a bullish flavor, having already reached a post-2020 high ahead of the index. That action doesn't guarantee that stocks will also achieve a new high, but it's more positive than the emergence of a third negative divergence.

CHART 1: S&P 500 COMPARED TO A RATIO OF FAGIX TO USMF. It's taking a bullish flavor with the ratio leading stocks higher. Chart source: StockCharts.com. For educational purposes.The green shadings in Chart 2 use the benefit of hindsight to establish uptrends for the ratio. Looking at the S&P 500's performance during these periods, it's evident that a rising ratio is bullish for stocks. The chart also shows it broke out from a huge base in 2022 and has been zig-zagging its way higher ever since. The blue arrows underpin the fact that the 200-week moving average (MA) has been a formidable support and resistance point. That characteristic enhances the significance of actual crossovers. The index is comfortably above the average at present.

CHART 2: S&P 500 BROKE OUT OF A BASE IN 2022 AND HAS BEEN ZIGZAGGING SINCE THEN. The index has been trending higher, bouncing off its 200-week moving average. Chart source: StockCharts.com. For educational purposes.

The iShares iBoxx High Yield Corporate Bond ETF (HYG) to the iShares 7-10-year Treasury ETF (IEF) also gives us a feeling for sentiment among bond traders. A huge negative divergence built up between 2019 and 2020, which was eventually confirmed by a trendline break in the index. The process was then repeated with a 2022 up-trendline confirmation, similar to that between the Fidelity and Vanguard funds in Chart 1. At the beginning of the current bull market, the HYG/IEF relationship experienced a positive divergence, whereby the ratio failed to confirm the new S&P 500 low. Now, the message is bullish because the ratio has broken to the upside and reached a post-2020 high.

Chart 3: S&P 500 COMPARED TO THE HYG TO IEF RATIO. The ratio has broken to the upside as the S&P 500 moves higher.Chart source: StockCharts.com. For educational purposes.

This breakout is shown in greater detail in Chart 4, confirmed by a bullish intermediate Know Sure Thing (KST). The long-term series has started to edge up but remains slightly below its exponential MA. Nevertheless, if the breakout turns out to be valid, it will likely have sufficient power to tip the finely balanced KST into a bullish mode as well.

CHART 4: ADDING THE KST INDICATOR. The intermediate KST shows a bullish signal, and the long-term KST is starting to edge higher. Chart source: StockCharts.com. For educational purposes.

Another method that helps us to gauge swings in confidence is to compare a defensive stock market sector to the price of an even more defensive bond ETF, a.k.a. the Consumer Staples Select Sector SPDR (XLP) to the iShares 20-year+ Treasury Fund (TLT). Using the benefit of hindsight, the green-shaded areas on Chart 5 show periods where the ratio has been in a rising trend. For the most part, such an environment has been positive for stock prices.

That said, there was one instance when Consumer Staples outperformed bonds, but equities sank. That period is represented by the gray shading. The chart shows that, in almost all cases, positive green shading was accompanied by the S&P 500 trading above its 12-month MA. During most of the gray-shaded period, it wasn't. Since the ratio is already ahead of equities at a post-2002 high and the S&P 500 index itself is above its 12-month MA, this relationship is in a positive mode, which suggests further equity gains lie ahead.

CHART 5: COMPARING S&P 500 TO XLP: TLT. This relationship is also in a positive mode, which suggests there could be more equity gains. Chart source: StockCharts.com. For educational purposes.

Our final relationship takes us abroad. Chart 6 compares the Dow Jones Global Index ($DJW) to the iShares International High Yield Bond ETF (HYXU) to Barclays International Treasury Bond ETF (BWX) ratio. It's the international equivalent of the HYG/TLT ratio. The pink shadings tell us that when the ratio's long-term KST is below its nine-month MA, it's generally bearish for equities. By the same token, the unshaded areas reflect a rising KST and, for the most part, rising stocks. This relationship is also in a positive mode. You can see how it broke out from a multi-year basing pattern at the beginning of the year and is leading the $DJW higher. The chart also shows three negative divergences, each followed by a trendline break and a subsequent decline. No such discrepancy exists today.

CHART 6: RELATIONSHIP BETWEEN DOW JONES WORLD INDEX AND XYXU:BWX. There were three negative divergences but as of now, the relationship is in a positive mode. Chart source: StockCharts.com. For educational purposes.

Final Thoughts

These relationships show that traders in stock and bond markets are in a confident mode and are not currently smelling sustained economic weakness. That doesn't guarantee higher equity prices, but it's much more encouraging than if these relationships were deteriorating.

Good luck and good charting,

Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group of Walnut Creek or its affiliates.

The much-awaited August jobs report was released on Friday. While it came in higher than estimates—187K vs. 170K jobs created—there were other areas of the report that eclipsed the stronger-than-expected figure.

Notably, the average wage increase was less than expected, and average hourly earnings rose 0.2%. What moved the needle there was that the revised job gains numbers for June and July, which went downward by a significant amount. Additionally, the labor force participation rate rose by 0.2 percentage points, and there was an increase in the number of people entering the workforce. The healthcare sector saw the most job increases, with leisure and hospitality, social assistance, and construction not far behind. This was welcome news for the stock market—an increase in workers can bring down wage inflation.

What It Means for the Financial Market

Does the jobs report show enough cooling in the labor market for the Fed to stop raising interest rates? Let's look at some areas of the stock market that tend to react to the jobs data.

The 10-year Treasury Yield closed higher. After pulling back from reaching a high of 4.36%, yields rose closing at 4.17%, which is above the 21-day exponential moving average (EMA).

CHART 1: 10-YEAR TREASURY YIELDS ROSE. After the August jobs report, yields rose higher closing above its 21-day EMA. Chart source: StockCharts.com (click on chart for live version). For educational purposes.

Oil prices also rose—the Energy sector was the best-performing sector on Friday. The rise was mainly on the news that Russia and possibly Saudi Arabia would cut their production. Crude oil prices closed above the August highs (see chart below).

CHART 2: OIL PRICES ROSE. A rise in oil prices could add to inflationary pressures but that won't be determined until the next CPI report. Chart source: StockCharts.com (click on chart for live version). For educational purposes.

The US dollar Index ($USD) has been trending higher and is now close to its May high. It may face resistance at the $104.40 level.

CHART 3: THE US DOLLAR INDEX HAD A STRONG MOVE TO THE UPSIDE. $USD could face resistance at the $104.40 level. Chart source: StockCharts.com (click on chart for live version). For educational purposes.

Equities, on the other hand, were lukewarm and showed little directional movement. However, the broader indexes have managed to hold on to their uptrend.

CHART 4: THE S&P 500 INDEX SAW LITTLE MOVEMENT. There's very little directional movement in equities. The S&P 500 index is still in an uptrend, trading above its 50-day moving average. Chart source: StockCharts.com (click on chart for live version). For educational purposes.

Looking at the CME FedWatch Tool, there's a 93% probability that the Fed will hold interest rates steady in their September 2023 meeting. But that probability reduces to 63.9% for the November meeting.

The Big Picture

The macro view looks stable, with the possibility of a recession pretty much diluted. If future data shows a cooling in inflation, there's a chance the Fed may stop raising rates. It almost seems like the market is going through a phase where it's behaving well. It's not making any surprising moves, and maybe investors are not opening new positions before Labor Day weekend.

That said, there's little in terms of economic data next week. It's possible that nothing much might happen till the Fed meets next. But then again, anything unexpected could happen between now and then.

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End-of-Week Wrap-Up

US equity indexes mixed; volatility down

• $SPX up 0.18% at 4515.77, $INDU up 0.33% at 34837.71; $COMPQ down 0.02% at 14031.81
• $VIX down 3.54% at 13.09
• Best performing sector for the week: Technology
• Worst performing sector for the week: Utilities
• Top 5 Large Cap SCTR stocks: Super Micro Computer, Inc. (ticker symbol: SMCI); Celsius Holdings Inc. (CELH); NVIDIA Corp. (NVDA); Dell Technologies (DELL); XP Inc. (XP)

On the Radar Next Week

• July factory orders
• August S&P Global Services PMI
• August ISM Services PMI
• July Wholesale Inventories

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Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

With the Federal Government piling on debt at a record rate, many investors are looking to gold as a way to protect against all the bad things that could happen as a result of the reckless spending. Part of the process would be deciding how much of a portfolio should be invested in gold. The general consensus seems to be that five to ten percent of assets is a good target, but some investors may be more concerned about the collapse of the dollar and other potential disasters, and they might want to put a much higher percentage into gold. Before doing that, they should consider that gold may not be completely safe either.

Back in 1933, when the Great Depression was well underway, President Franklin D. Roosevelt signed the Gold Confiscation Act, an executive order that made it illegal to own gold. It required all persons to deliver their gold to the Federal Reserve in exchange for $20.67 an ounce, which was significantly lower than market value. It was meant to take the U.S. Dollar off the gold standard, to stop hoarding, and to prevent contracts from requiring payment in gold. (The Order was repealed in 1974.) A year later, Congress passed the Gold Reserve Act of 1934, removing any doubt as to the viability of the executive order.

Could something similar happen today or in the future? In my opinion, we can't rule it out. That is not to say that I think it will happen, but let's face it, an executive order only requires the signature of one person.

A significant difference between 1933 and now is that, in 1933 we were on the gold standard. Today, we're not. Also, we're not in crisis, yet.

Conclusion: In commercials for gold, it is usually pitched as bulletproof protection against a myriad of potential disasters, but we're talking about the future, and the future cannot be known. One thing that happens is that they change the rules. A good example is that bond holders are supposed to be paid first in bankruptcies, but in the financial crisis, GM bond holders were left out in the cold. And then there's FDR. Consider this when deciding how much gold you should own.

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Before departing, let's look quickly at a monthly chart of gold. Since the 2011 price top, gold has been in a high-level consolidation. It began with a dip of nearly -50%, then returned to the top of the range in 2020. Since then, it has continued to consolidate and in a much narrower range. We can also interpret the prior 12 years as a bullish cup with handle. We think that the handle was completed at the 2022 low, and that the next move will be a breakout to new all-time highs. But we shall see.

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What if you had access to a forecasting tool capable of predicting the most likely path prices may take roughly in the next three months? The caveat here is that it can't accurately pinpoint the peaks and troughs, but it can approximate them with relative accuracy.

This is essentially what market cycle methods or indicators attempt to do. Markets move in cycles; they have highs and lows. We also know that these cycles are consistent, though not always symmetrical. That last part is what makes their predictability aspect frustrating and unreliable.

As part of his suite of indicators designed to help you time market entries, Larry Williams developed the Williams Cycle Forecast, partly out of the same frustration many traders experience when adopting cyclical analysis to time the markets. Williams' indicator was designed differently.

Introducing the Williams Cycle Forecast

The Williams Cycle Forecast is a technical analysis indicator designed to anticipate and predict an asset's peak-and-trough cycles. On the daily chart, the forecast goes as far as three months into the future.

As its name suggests, the indicator homes in on the repetitive cyclical patterns that a stock (or any other financial asset) exhibits over time. The point of the indicator is to harness these cyclical patterns and predict probable price peaks (tops) and troughs (bottoms).

How does the Williams Cycle Forecast achieve this? Larry Williams took what he saw as the three most consistent short-term cycles and amalgamated them into a single cycle. This approach, he believes, ensures a balanced interplay between the three, offering a more reliable price projection over the subsequent three months.

How Do You Interpret the Williams Cycle Forecast?

First, look at the peaks and troughs. Note how the price aligns (sometimes roughly, other times more accurately). Note that the peaks, troughs, and movements to and fro were forecasted up to three months in advance.

After you identify these alignments, be sure to look ahead on the chart. Are there any particular patterns, trend continuations, or reversals that can help you anticipate buy or sell points in the weeks ahead? Let's look at a few examples.

CHART 1: MICROSOFT (MSFT) DAILY CHART SHOWING CORRELATION BETWEEN PRICE AND FORECAST. Chart source: StockChartsACP. For educational purposes.

Note the Vantage Points

First, look at the top green arrows marking the "vantage points" of each observation period in May and August. At each point, all you could see were the price predictions generated by the Williams Cycle Forecast.

Look at the Forecasts

Remember that market cycles are more "art" than "science." They're not always accurate. But, in this case, they approximate the price movements quite closely.

A— Back in May, the Williams Cycle Forecast called the bottom accurately. Remember, at this time, the forecast would have preceded the actual prices (which hadn't yet unfolded).

B— This marked a buy point based on a trend breakout in the Williams Cycle Forecast. It was a little late (as you could have entered earlier upon a price breakout), but still, not a bad approximation.

C— By the beginning of June, you would have seen a peak in a trend projected toward the end of August, after which a decline toward a periodic trough was soon to be projected.

D— The trough occurred, as predicted, right at the beginning of October. By then, another peak was projected by the end of the month.

E— The forecast approximated the peak in prices a little early, but still, that's what to expect when using market cycles to forecast prices. Again, it's about approximating market turns, not pinpointing them.

Still, cycles can be way off in trend direction, but relatively accurate in approximating the peaks and troughs that mark potential turns in the market.

Let's now look at an intraday chart, as the Williams Cycle Forecast also works well with intraday charts. The chart below is a 15-minute chart of Amazon (AMZN).

CHART 2: AMZN 15-MINUTE CHART. The chart displays the Williams Cycle Forecast 66 candles ahead of prevailing prices.Chart source: StockChartsACP. For educational purposes.

Note the two vantage points marked by the green arrows. The line following each arrow shows the 66-candle projection you would have seen during each vantage point. The last vantage point is current to the time of writing, and we can see the forecast ahead of prices.

Look at the Forecasts

A— The forecast called the bottom quite accurately.

B— This shows a buy point based on a breakout of the Williams Cycle Forecast trend. An earlier breakout in price (see the price chart above the indicator) would have been more effective; yet again, the cycle forecasts were not designed to pinpoint these triggers (there are other methods and tools to help you pinpoint market entries and exits).

C— From the first vantage point on the left, you would have seen a projection of an uptrend culminating in a peak. Would this have been helpful beforehand? Arguably, yes, it would have been, especially as prices began to decline a few candles after the initial starting point.

D, E, and F— Will we see a continued uptrend and a decline in the next 66 candles?

The Williams Cycle Forecast is a versatile tool if you apply it correctly. As you can see, it's suitable for daily and intraday charts, making it adaptable for different types of trading. By default, it operates on a time frame of 66 trading days, roughly three months. Note, however, that this default setting isn't rigid. You can modify this "displacement value" to find a cycle duration that best matches the particular stock you're examining.

The Bottom Line

The Williams Cycle Forecast is a unique tool you can use to anticipate potential peaks and troughs in the market. It's designed to provide a predictive framework that extends up to three months (or 66 candles). And it works for short-term to intermediate-term timeframes, making it versatile for various trading styles. While the tool doesn't guarantee precise market turn timings, it often does a decent job of approximating these shifts.

Some traders feel that's enough of an edge to aid their strategies. You'll have to decide for yourself whether that rings true for you as well. Remember that all market cycles lean more toward art than exact science. This means that it helps to use it in conjunction with other tools and methods. But if gaining access to an effective forecast indicator can help enhance your trading, as it does for Larry Williams, then it might be worth the cost to gain that extra edge. Happy trading!

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Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.