What Is The 4-Year Cycle In The Stock Market Telling Us?

I haven't heard much lately about the 4 year cycle in the stock market so I'd like to post my opinions about this well known and very accurate cycle.

For those of you who are not familiar with the 4 year cycle I suggest you get your hands on a long-term chart of the Dow Jones Industrials and observe the significant lows or buying opportunities that have taken place over the past 100 years. You'll notice that approximately every 4 years there is some kind of a low that takes place in the stock market and it's been very accurate over a long period of time.

In the above chart I show the S&P going back to about 1981. Notice how every 4 years the stock market makes a low which is followed by a rally. The first low on this chart took place in 1982... 4 years later in 1986 we have another cyclical low where the market had an explosive rally just prior to the 1987 crash. The next low in the cycle takes us to 1990 where we saw another buying opportunity. The same thing happened again in 1994, 1998, 2002 and 2006.

Based on this cycle, the next projected low for the stock market is due in 2010! This means stocks should trend lower going into the fall of 2010. I know it's an ugly forecast and many will disagree with me, but from a cyclical viewpoint I have to be looking for stocks to move lower to sideways over the next 2 years.

Does this mean I will only play the market from the short side for the next 2 years? Of course not! There will be opportunities on both sides of the market depending on which sectors you are trading. The point I'm trying to bring out with the above chart is that the majority of stocks in my opinion will be under selling pressure until the 2010 cyclical low is established. Until then, I'd favor selling short into rallies.

Downside Target For The Dow Jones Industrials

The stock market got hit again today with the dow jones industrials falling 220 points. My first downside target was almost reached this afternoon as can be seen in the above chart. If the dow can sell off just a little bit more, I will exit two thirds of my short position.

I still have some Q's long and my protective stop is below last week's low. The NASDAQ in my opinion is still holding up much better than the rest of the market. If stocks can bounce just a little, I think the NASDAQ will take off.

Reverse Divergence...What Is It?

I'd like to talk about a trading method known as reverse divergence. Some people like to call it hidden divergence but I prefer reverse divergence because it is the reverse or opposite of your standard divergence.

A standard divergence is when price makes a new swing low but the oscillator diverges by making a higher low. This is called a bullish divergence and is considered bullish by many traders. A reverse divergence is when the oscillator makes a lower swing low while price makes a higher swing low. This is called a bullish reverse divergence.

In my opinion reverse divergence trades are more reliable than standard divergence trades because you will be always trading in the direction of the prevailing trend. In other words, a bullish reverse divergence will form in the direction of the trend while a standard bullish divergence will form against the trend in an attempt to pick a bottom. Sounds confusing right? Don't sweat it...The above chart will clarify what a bullish hidden divergence is.

Above is a chart daily chart of SOHU. Notice from points A to B the stochastic oscillator is making a lower low while the price action is making a higher swing low. If you look closely at the chart you will also notice that SOHU is in an uptrend for the past 7 months. SOHU has also been showing amazing relative strength compared to the S&P.

I actually bought SOHU today based on the above setup. My stop is right below $46.00 and my profit objective is around $66.00.

The above comments are not a recommendation to buy or sell SOHU. I'm simply just sharing with all of you what I am doing and why I am doing it.