Both the Presidential Cycle model and the 10-Year Post Bubble model point toward an important high in equities in the near future.
It is now 122 months since the inflation adjusted price of the Dow topped in 2000. For the S&P and NASDAQ it is 120 months. This approaches the similar time periods of 121, 123 and 125 months that provided recovery highs following the 1989 top in the Nikkei, 1966 in the Dow and 1929 in the Dow.
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The analysis of the market action in the four-year presidential cycle shows that after a strong first year and a 7%+ correction into the first quarter of the midterm year (i.e. 2010) a rally of five to six weeks should find resistance at the 10-week Bollinger Band. The February 5th low was 9.2% from the January high and we have now finished the fourth week of the rally. Resistance in the S&P (currently 1134) should be found around 1155.
Because the current rally is occurring without a test of the Feb 5th low (as experienced in 1990 & 1994) there stands good chance of a failure as we move into the second quarter. Once we’ve tested resistance traders can look to sell the first week with a lower high or lower low. Risk should be limited to the previous week’s high.
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