Another Climax Run?

The market action has frustrated me for the last two weeks. My analysis of cycles suggested an imminent deeper corrections that has not happened (yet). I believe in times when market seems to oppose logic it is best to try to find a past analogy just to see what can be expected in the near term future. By the way, I've decided to rename my cycles for more clarity. I will name them according to the average length of the cycle. Thus, the 18-day cycle means this is the cycle with an average length of 18 days. For 5-month cycle, average length is 5 months and so on.

So, let's start with the facts that we certainly know. Stock market has been stubbornly griding higher for three weeks without any minor sign of exhaustion. Momentum and money flow indicators go from overbought to more overbought. What can we conclude from this?

The first chart below is from February to May 2010. As we can see conditions back then were pretty similar to today's. The second 18-day cycle out of 5-month cycle bottom was accumulation period when both indicators stayed overbought for a long time. The next cycle was choppier as retails started to chase the rally and smarts selling to them. It all finished with a final blow-off top.

Next chart is from September to November 2010. A similar story. The first 18-day cycle after significant bottom was accumulation period, followed by two more choppier cycles with shallow corrections.

Another example is start of 2011. This one was a little bit different. The accumulation period was not so obvious and it stretched into two 18-day cycles. The rest of the story is pretty much the same. Several shallow corrections all being bought until the final climax run.

Now, let's make some general observations before moving to current conditions. First, notice the obvious separation from accumulation to distribution period. Accumulation period exhibits a very well defined uptrend with almost no pullbacks and all indicators staying in overbougth range for several weeks. During distribution period price action tends to become choppier, momentum line starts to wiggle and MFI barely moves above 80 as every rally is being sold.

Regardless of the cycle count it looks like we have just witnessed accumulation period. Every indicator I look (price/volume, stochastics and MFI) display these properties. Timing wise I am not so sure that 18-day cycle low is already behind us. We are on day 21, which is very late, but the constantly overbought MFI suggests we may still see that 2-3 day pullback before continuation of the uptrend.

Cyclicaly speaking we are in the timing band for a 9-week cycle low and in the timing band for a 18-day cycle low. A 3% drop should probably be enough to satisfy these conditions. On the other hand, the 9-week cycle may easily extend up to 12 weeks, so another 18-day cycle until the 9-week bottom is not out of question. Also, mind that we are officially still in a bear market. The long term 5-month cycle is not so far away and it is simply hard to believe that we may see another month or so of higher prices. But who knows?

I basically see two possibilites right now. The lenght of this rally and money flow suggest a very strong accumulation that should spurt another powerful push higher. On the other hand the parabolic look of this final week may also mean that we may just witness a couple more days of climax run, followed by a plunge. Although I like to make long term projections my trading decisions are (or at least should be) made based on short term market action. Right now markets are way overbought and even if this rally turns out to be a climax run I have no intention to buy anything until I see at least a 2% correction that would release overbought conditions, confirm my initial view that accumulation period is coming to an end and print a clear cycle low, whether it be just 18-day or 9-week cycle. So, currently I'm in a waiting mode until some high pribability setups present.