S&P's sideways shuffle
Could this be the calm before the storm? I suppose it could be. However, the conventional interpretation of a tight sideways shuffle after a strong up-move is that the markets are merely pausing for breath. Further gains are surely the most likely outcome, therefore. Aside from the time of year, the most likely reason for hesitation is that the indices are very close to important resistance levels.
FTSE falters
In the case of the FTSE 100, the index has stalled just around the 5860 level. This level provided support on numerous occasions in late 2011 and early 2012. It has now become resistance. Likewise, for the Dow, the market has struggled to break out of the rising channel in which it has traded since mid-June. I do not regard these levels as anything more than temporary obstacles, though. Advances on the highs - at 5989 and 13338 respectively - still seem more likely than not to me.
Dow's path blocked
There is certainly scope for this move to occur in the near term. Despite adding nearly 10 per cent since early June, the Dow Jones is nowhere near overbought. Its daily relative strength index reading was 61 per cent on Monday 13 August. Near-term highs are much more likely after it has already attained 70 per cent - and probably stayed above there for some time.
Dow's dates with destiny
The main time cycle in the Dow also leaves room for more upside. The 87-day cycle is due to turn around 30 August. This cycle has proved very helpful to me over the past couple of years, or at least on those occasions when I have heeded its messages. It clearly caught the highs to date back in May. Its last turning point - in early July - was a dud, though. That did not surprise me, as the market was not at an extreme high or low, but merely mid-range.
If the Dow continues to rally into the end of this month, then there is surely a good chance of another decent correction beginning around then. That would certainly fit nicely with the seasonal tendency for stocks to struggle in September. However, I should stress that I am talking about a pullback in equities, rather than anything more sinister. In an uptrend, such as the US indices are plainly in, I treat cyclical highs as moments for profit-taking ahead of the next buying opportunity.
The important thing to remember about cycles is that they are secondary to the price action. A cycle turning date is never a reason in itself to trade. It is an additional reason to trade, but only if other factors are also present. These include an overbought or oversold momentum reading, as well as a relevant development in the price, such as a swing-chart signal or a breach of an important moving average. If none of these are present come late August, I shall continue to run with the bulls.
