November 21, 2008 Vol. 11, No.

07 Advanced Technical Analysis of the Financial Markets

STOCK MARKET
7,500 Dow Support; 750 S&P Support
Four and a half years of bull market wiped out in
one year. A precipitous decline to be sure.

The charts of the Dow Industrials and the S&P

500 show that price declines in these two indices
have fallen to the 7,500 and 750 levels
respectively. These are MAJOR price octaves in
my work and are likely to be supportive for the
overall market in my opinion. I note that these
zones of support contained the 2002-2003 bear 7,500 Price Octave Major Support
market lows as well. The NASDAQ Composite
has fallen to just below its 0.786 fibonacci
support line but is likely to rebound quite smartly
back above that threshold in the near-term.
The Harley Market Letter and Update Service are published by Harley Capital Management, P.O. Box 1062, Thousand
Oaks, CA. 91358-0062, telephone 805-558-3590, website: www.harleymarketletter.com, e-mail sharley1@verizon.net.
Copyright © 2008. All rights reserved. No copying, reproduction, or electronic transmission may be made without written
permission. All trading and investment decisions are the sole responsibility of the subscriber. Clients and principals of
Harley Capital Management may have positions in the markets reviewed.

1
 On the time-side of the analysis
equation, I believe we probably hit a
momentum low today and are likely to
see some modest buoyancy in the short
term. Readers may recall a cycle that I
identified as being 107-108 TDs last year
that marked the August 2007 and
January 2008 lows. That 107-108 TD
cycle is actually the half-span harmonic
of a periodic function that averages 213
trading days or 44 weeks. I’ve traced
this cycle back to the 08-Oct-1998 low
point. This cycle has been quite regular
in its beat. The chart on page 1 shows
0.786 Retracement that the occurrences of this cycle have –
in all but one instance – marked low
points in the stock market. The troughs
depicted in the chart show that although
this cycle has coincided with important
market turns, most of the inflection
S&P 500 Cash Index
377 Trading Days (TDs)
points have not been the terminal points
0
11-Oct-07 High
in a move. For that reason, I am inclined
to believe the move out of today’s low is
31-Oct-07 High likely to be akin to the move out of the
-20
December 31, 2002 (or October 10,
226 (233) TDs
2002) low. Those lows preceded the 12-
19-May-08 High Mar-03 cycle bottom by 54 and 108
-40

187 (188.5) TDs

trading days (TDs) respectively. It’s my
theory that today’s 44 week cycle low is
-60
13-Apr-09 / 01-May-09
108 TD Low
likely to precede the final cycle bottom
377 TD / 78 Week Low in the current bear market by 108 TDs.
21-Nov-08L
-80
44 Week Low Indeed, I don’t look for any significant
26-Nov-07L price expansion until a host of cycles
108 TDs
come together next April / May. The
17-Mar-08L
-100

15-Jul-08L
April 13 – May 01, 2009 time period
01-Oct-07 23-Jan-08 14-May-08 04-Sep-08 24-Dec-08 20-Apr-09
looks very interesting from a cyclical
144%R 20% S.F. 4% S.F. perspective for the next bull market to
begin.

S&P 500 Cash Index

10

-5

-10

-15

-20

84.6 TD Cycles
-25

13-Jun-07 29-Aug-07 14-Nov-07 04-Feb-08 04/22/2008 09-Jul-08 24-Sep-08 10-Dec-08

7 Day Velocity 14 Day Velocity 18 Day Velocity

2
Fibonacci Number 377
Appears to be the
Dominant Factor in
Defining Most Market
Cycles
Those of you that have followed my
work for some time are well-aware of
my premise that the Fibonacci number
377 seems to be the dominant factor in
defining most market cycles. I have
found 377 unit cycles to exist across the
spectrum of time frames on yearly,
monthly, weekly, daily, hourly and even
five-minute charts. If there is a magic
number in the markets, it most definitely
is the number 377.

These 377 unit cycles – like all market

cycles – contract and expand like an
accordion. Although I’m pressed to The chart above also
define some hard-and-fast variance
May 26, 1970 Anchor Point highlights my premise that
Through trial and error I found that the low that cycle lows should more-
parameters, a 377 unit cycle typically
occurred back on May 26, 1970 is one that has properly thought of as the
spans 288 – 466 time units (377 +/- 89
significance for this cycle. I call this significant point in time to expect
units). If a 377 unit cycle contracts
point - which provides the best least-squares fit cyclical change – not
within the current phase, the next phase
to the cyclical data - the anchor point. Indeed, necessarily the price-
usually expands so that the summed
the 377 TD cycles projected from that May 26, extremes in a given move.
length of two consecutive cycles comes
1970 date have punctuated every single
very close to 754 time units.
intermediate turn of importance – mainly lows – If the pattern in this cycle
Occasionally it takes three occurrences
until recently. I have pinpointed 25 distinct continues – and I do
of the cycle to bring the beat back to its
occurrences of this 377 TD rhythm emanating believe it will – we should
predicted point, in which case the total
from that 26-May-70L. 377 X 25 = 9,425 look for the next
time span of the three 377 unit cycles
TDs; 26-May-70L + 9,425 TDs falls exactly on occurrence in this 377 TD /
comes very close to 1,131 time units.
October 11, 2007. Those same 9,425 trading 78 week cycle for the April
Thereafter, the rhythm resumes its
days spanned a total of 1,950 weeks – 13 – May 01, 2009 time
trough-to-trough sequence very close to
producing a net average of 78.0 weeks.
its predicted point. period.

Brazil Bovespa Index U.K. FTSE-100 Index

3
 NASDAQ Comp. vs. DJIA

400 6

300

NASDAQ Comp. (Red)

DJIA (Green)

Thousands
200 3

100

0 0
01/11/2001

08/24/2001
10/18/1999

05/31/2000

04/16/2002

11/25/2002

07/11/2003

02/24/2004

10/06/2004

05/19/2005

12/30/2005

08/15/2006

03/30/2007

11/09/2007

06/25/2008

02/06/2009
NASDAQ 1999-2009 DJIA 1929-1939

NASDAQ Juxtapositions with the Dow Industrials and Nikkei 225

This is an update from the two graphs I showed in the October issue. The tops are aligned so as to be coincident, with the
evolving structure demonstrating remarkable duplicity. Indeed, the October 2007 highs occurred virtually right on
schedule. The magnitude as well as the timing of the turns continue to parallel the prior occurrences in both the Dow
Industrials and the Nikkei 225. They both argue the potential for a pending turn.

NASDAQ Comp. vs. Nikkei-225

45 6

40
5

35
4
NASDAQ Comp. (Red)
NIKKEI-225 (Green)

30
Thousands

Thousands

25

2
20

1
15

10 0
01/11/2001

08/24/2001
10/18/1999

05/31/2000

04/16/2002

11/25/2002

07/11/2003

02/24/2004

10/06/2004

05/19/2005

12/30/2005

08/15/2006

03/30/2007

11/09/2007

06/25/2008

02/06/2009

NASDAQ 1999-2009 Nikkei-225 1989-1999

4
 323.1 Week /
“Six-Year” Cycles
Probably the most dominant – and most
reliable – of all the long-term cycles that
I track is a 215.4 week or “four-year”
cycle. I have found that the June 13,
1949 low point has provided what I call
the “anchor point” from which I project
the 215.4 week recurring market rhythm.
The black triangles at the bottom of the
center graph reflect the 215.4 week
successive beats from that 1949 low
point. Notice how precisely this has
defined most of the bottoms of the last
20 years.

This cycle – like all market cycles –

contracts and expands over time. The
regularity of the pattern over the last 20
S&P 500 Weekly
years has been quite remarkable. Indeed,
0
the low on March 12, 2003 came
virtually right on schedule.
-20

However, comma, as I like to say, a

09-DEC-94L twenty year look-back is not sufficient to
08-OCT-98L
-40
09-Dec-94L 08-Oct-98L assess the degree of variance in this
cycle. Through trial and error, I recently
-60
11-Oct-90L found that a close examination of every
three occurrences in this 215.4 week
rhythm produced some interesting
-80 results. Indeed, if I take each third
occurrence (215.4 weeks X 3 = 646.3
12-MAR-03L
12-Mar-03L weeks) and divide that quantity by two
-100

03/09/1990 01/07/1994 11/07/1997 09/07/2001 07/08/2005 05/08/2009

(646.3 weeks / 2 = 323.1 weeks) an
144%R 144%R 20% S.F. 144%R 2% S.F. Proj 215.4 Week Cycle Low
interesting pattern emerges (chart at
bottom of page). Note how this cyclical
rhythm (approximately six years) picks
up a number of significant market turns.
The linear scaling detracts a bit from the
magnitude of those cyclical low points,
so I will highlight a number of them over
the last 30 years: 03-Mar-1978L, 24-Jul-
1984L, 11-Oct-1990L, 07-Jul-1996L,
and 12-Mar-2003L. The next occurrence
in this rhythm – by my calculations – is
due in the May 01, 2009 time period.
That’s very interesting, indeed. May 1st
is exactly 108 TDs from today
(November 21, 2008). I also have my
next 377 TD / 78 week cycle targeted for
April 13, 2009. In summary, I would
expect we’ll see some modest buoyancy
in this market in the short term. But I
don’t look for any serious price
expansion in equity prices until next
April / May 2009.

5
 U.S. Treasury Bonds
For some time bonds have maintained a
contra-cyclical effect with the equity
115’20 markets. As stocks have fallen, bond
Price Octave prices have risen, and vice versa. The
108 TD cyclical function I have
overlayed on the chart at left lines up
with cyclical high points in the bonds –
as well as cyclical low points in the stock
market. The bond market is – to put it
mildly – excessively overbought. The
panic buying this week may well turn
out to reflect an “island reversal” on the
charts. This fact – coupled with the
arrival date of this 108 TD cyclical
108 TD Cycles
function – leads me to believe that bonds
Derivation: 377 X 2 / 7 = 108 are ripe for a sharp pullback beginning
right away. It would not surprise me at
all to see a rapid retracement back down
to the 115 20/32nds line once again.

*************************************************
PRECIOUS METALS
Since topping out on March 18th, gold traded on
the Comex has continued to make a series of
lower highs, lower lows. It’s my view that the
metals complex has seen its bull market top and 750 Price Octave
we are now in a bear market decline that could Support
last two-three years.

7,500 for the Dow, 750 for the S&P, 750 for
Comex gold. Sound familiar? At any rate, it
would appear that gold has found short-term
support at its 750 price octave. But I view any
rally from here as counter-trend in nature. My
next 69.2 TD cycle is due right around the end of
December. I wouldn’t be surprised to see the
metals hold up until that date, with the next
occurrence in this cycle marking the high-point
reversal – from what-ever price point that occurs.
Next floor of support on the way down: 625.
The XAU would appear to have found short-term
support at its 75 price octave. In the rebound, I
look for this index to push back at least to its 100
price octave – then reverse back to the downside.

THE HARLEY MARKET

LETTER UPDATE
Readers are urged to monitor The Harley Market
Letter UPDATE for any changes in my advisory
Outlook. See my website for details.