THE

HARLEY
MARKET LETTER

June 16, 2016 Vol. 18, No. 01 Advanced Technical Analysis of the Financial Markets

(93.02)
1.000
91
(93.02) (93.02) Nov. 08, 2016
1.000 1.000 Election Day
149
[150.26] 93
1.618 June 23/24, 2016
(93.02)
(Brexit)
1.000

93.02 TD Trend Change Cycles:

(Fib 13) X 16 / 5 = 93.02

STOCK MARKET This decision will have a profound

Down into June 23/24, 2016
Time Period Then New Highs
Following an across-the-board rally into
the first week of June, the market has
begun to pullback from the upper pattern
boundary of its 1 year trading range.
Intense media-focus is now surrounding
the June 23rd referendum in the United
Kingdom on whether to exit (BrExit)
or remain a part of the European Union.
The general consensus suggests that
separation would lead to lower equity
prices in the short term and a possible
secondary adverse effect on the Euro due
to the precedent setting event of a
country leaving the European Union.
effect on the economic direction
for not only the U.K. but for the
European continent as well. Given
that my work points to a market
reversal in the vicinity of that
election, I suspect the results in
whatever form will be viewed as
a net positive. Since late 2014 I
have been tracking the progression
of a cyclical function for the broad
market indices that averages 93.02
trading days. This cycle like all
market cycles can wax and wane
but my statistical analysis of the
data series hones-in on the June
23/24, 2016 time period for its
next recurrence.
Each of the lows over the last 1
years marked by this cyclical
rhythm has been a washout-low on
the charts and I expect this next
recurrence will be no different.
Investors are being presented with
yet another fireside-sale on the road
to new fresh, new all-time highs.
My premise remains: This elevator
is going higher with new all-time
highs coming to a theater near you.
Investors may wish to consider
those Exchange Traded Funds
(ETFs) that are fashioned after the
S&P 500: SPY, SSO (2X
leverage), and SPXL (3X
leverage).

The Harley Market Letter and Update Service are written and published by Stan Harley, 1153 Pan Court, Newbury Park,
CA U.S.A. 91320, telephone 805-484-4258 / 805-558-3590, website: www.harleymarketletter.com, e-mail
sharley1@verizon.net. Copyright 2016. 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.

1
 Successful Investing Requires
the Development and Mastery
of Three Critical Skills
1,921 TDs 1,941 TDs What most in this business do not
recognize is that successful investing
requires the mastery of three separate and
wholly distinct skillsets: Asset selection,
risk/money management, and market
timing. Of the three, the latter market
timing is by far and away the most
important.
Many in this industry will propound the
notion that no one can time the market
and that any effort to do so is foolhardy.
But thats absurd. Market timing is not a
sin. It is, though, a critical skill that very
few possess. Indeed, most investors and
market strategists both professional and
retail alike all-too-often fail to identify
the key pivotal turns in the financial
S&P 500 Cash Index markets. Market timing as most of you
15 are well-aware is an extraordinarily
difficult task. What these investors and
10
strategists have in common is the critical
5
omission of technical analysis especially
cyclical analysis as part of their analytical
0
processes. The awareness and
-5
understanding of market cycles is the
essential factor in determining how long a
-10 trend should run and when to expect
reversals. Unfortunately, too many believe
-15
that anyone can profit in the financial
markets regardless of skill level. In reality,
Price Velocity Measures the Cyclical Functions
-20
Trending Southbound
15-Oct-14
11-Dec-14
10-Feb-15
09-Apr-15
05-Jun-15
03-Aug-15
29-Sep-15
24-Nov-15
25-Jan-16
22-Mar-16
18-May-16
15-Jul-16
it takes years to develop and fully master
the critical skills necessary to make
7 Day Velocity 14 Day Velocity 20 Day Velocity
investing a successful endeavor.

2
 Most Common Expansion / Contraction Functions
Cycles provide the essential algorithm in The ratios at right define the
predicting how long a trend should run and most common expansion / 1.618 / 0.382
when to expect reversals. I have written and contraction functions that occur.
lectured extensively regarding my theories that Notice the sum of each of the 1.236 / 0.764
financial market cycles for all markets and all
time frames can be derived mathematically
pairings adds-up to the number
two. 1.618 / 0.382 1.382 / 0.618
from the Fibonacci series. But, in reality, cycles
are not always a precise ticking clock. Like any
expansion/contractions are by
far most common, followed by
1.447 / 0.553
stream of data comprising a solution set, the 1.236 ( = 5 - 1) / 0.764, 1.382 / 1.553 / 0.447
time period between cyclical occurrences will 0.618, and so on as shown.
frequently vary from beat to beat.

39.8 Trading Day (TD) CYCLES

24?

41 66 34

31 34
43 68
25 43
16

39.8 Trading Day Cycles
What first led me on the road in my study of
market cycles was an awareness of what
appeared to be a recurring rhythm on the daily
charts of the stock market of roughly 40 trading
days (TDs). I saw this recurring rhythm over
and over but for many years I could not explain
it. Indeed, 40 unit time functions appear quite
common not only in the stock market but other
markets as well. Biblical scholars, too, are well
aware of the common reference to 40 unit
time recurrences.
It took most of my 35 years of
market investing to uncover the
cyclical relationship involving
the Fibonacci series and the
square root of five. I have
found that dividing each of the
Fibonacci numbers by the
square root of five produces a
numerical series that defines all
of the cyclical functions we see
in the financial markets all
markets, all time frames.
The above chart of the S&P 500
($SPX) depicts this 40 trading
day cycle quite well, where: (Fib
89) / 5 = 39.8. This cycle is not
always precisely 40 (39.8) TDs,
of course. It can expand by a
factor of 1.618 to 64.4 TDs (+/-)
or contract by a factor of 0.382 to
15.2 TDs (+/-). But over the
long haul loosely defined as
at least 10 iterations the average
falls right at 39.8 TDs.

3
 NYSE Advance / Decline Line NYSE New High / New Low Line
340 150

330

100

320
Thousands

Thousands
310 50

300

290

280 -50
20140815 20141110 20150206 20150505 20150730 20151023 20160121 20160418 28-Jun-06 05-Aug-08 25-Oct-10 17-Aug-12 15-Aug-14 10-Aug-16

Advance / Decline Line New High / New Low Line

NYSE Advance / Decline Oscillator NYSE High/Low Differential

1500 300

200

1000 100

0
500
-100

-200
0
-300

-400
-500
-500

-1000 -600

-700

-1500 -800
15-Aug-14 08-Jan-15 03-Jun-15 23-Oct-15 18-Mar-16 10-Aug-16 15-Aug-14 08-Jan-15 03-Jun-15 23-Oct-15 18-Mar-16 10-Aug-16
27-Oct-14 23-Mar-15 13-Aug-15 06-Jan-16 31-May-16 27-Oct-14 23-Mar-15 13-Aug-15 06-Jan-16 31-May-16

10 Day M.A. 30 Day M.A. 10 Day M.A. 30 Day M.A.

Market Internals
I find it noteworthy the NYSE Advance /
Decline Line has displayed considerable
strength throughout the course of the February -
June rally. As a reminder, the A/D Line is
constructed by computing a running summation
of each days net difference between advances
and declines on the New York Stock Exchange.
Generally speaking, the A/D Line serves as a
confirmation indicator of the trend. With the
10,000 Support NYSE Advance / Decline line making new all-
time highs of late, the technical underpinnings
strongly support my premise that new highs for
the popular averages are coming to a theater
near you probably in the month of July with
the S&P and DJIA leading the pack and the rest
of the popular averages to soon follow. The
New York Composite the index of stocks
upon which data for the A/D Line is derived
remains sandwiched within the 10,000 and
10,625 levels. I look for a breakout enroute to
new highs for this broad-market index as well.

4
 When Will the Great Bull Market End?
DJIA Yearly January 2023

100000

(93.02)
115 94 (1.000)
(1.236) (1.000)

0.000 0.382 1.000

10000

1000

1929

100
1942
1835 1932

0.000
10 1720

1859
1842
1.000
0.618
1784
1

1695 1773 1851 1929 2007 2085

(39.8 X 6 = 238.8)

93.02 Year High-High Cycles

(Fib 13) X 16 / 5 = 93.02
DJIA - 93.02 Year Cycle Regression Analysis
Observation Increment X Y Turning Point H/ L Years Y = mX + b Actual - Predicted
1 0 0 1720.5 01-Jul-1720 High 1720.3869 0.1131
2 1.236068 1.236 1835.75 29-Sep-1835 High 115.246 1835.9984 -0.2529
3 1.000 2.236 1929.67 03-Sep-1929 High 93.9245 1929.5302 0.1398
4 1.000 3.236 High 2023.0619 = 23-Jan-2023

Regression Output:
Constant 1720.39 = Y-Intercept (b)
Std Err of Y Est 0.3104 = 1 Std Dev., 68% Probability, Year
R Squared 0.999996
No. of Observations 3
Degrees of Freedom 1

X Coefficient(s) 93.5317 = Computed Cycle Length, Years, (m)

Std Err of Coef. 0.1959
Standard Deviation / Cycle Length = 0.33%
Std Err of Y Est 3.7245 = 1 Std Dev., 68% Probability, Months

5
 World Indices
I note the European indices all bottomed
in February in concert with their U.S.
counterparts. However, in contrast with
the American markets, the European Big
Three the Germany DAX, United
Kingdom FTSE-100, and France CAC-
40 remain well-below their 2015 highs.
Perhaps fears of the British exit from the
Euro Zone may be serving to keep a lid
on any upside momentum. Never-the-
less, the cyclical highs and lows match
up virtually to the day with our DJIA and
S&P. With a pending 93.02 TD cycle
low due in the June 23/24th time frame, I
look for the election outcome in the
United Kingdom to be perceived
ultimately as market friendly with an
across-the-board rally commencing
shortly after the voting results are
tabulated and digested by the world
markets.

6
 39.8 Week Cycles
Derivation: (89 / 5) = 39.8

50 Week M.A.
Still Declining
1.000 1.618
1.000
1.000

1.000 1.000

October 1958
July 1980
Spot Oil Price
W e st T e xa s In te rm e d ia te
July 2008 Crude Oil
Crude oil prices rallied into early June and
have since begun to retreat. Price found
0

recent resistance just above $50 spot. My

-20 analysis of the price data depicted on the
chart above depicts an intermediate term
trough-to-trough cycle averaging 39.8
-40
weeks the same 39.8 unit cycle that
defines the movements on the stock
-60 market daily chart. The pattern would
indicate lower prices are in store between
August 1966 now and late October / early November. I
-80
have identified the November 08, 2016
time period as the subsequent recurrence
0.382 0.236 0.382 for a stock market low we may see crude
-100

Jul- 5 4 N ov -6 2 M a r-7 1 Jul- 7 9 N ov -8 7 M a r-9 6 Jul- 0 4 N ov -1 2 bottom then as well. My regression

S e p- 5 8 Ja n -6 7 M a y-7 5 S e p- 8 3 Ja n -9 2 M a y-0 0 S e p- 0 8 Ja n -1 7
analysis has identified the November 2018
144%R 20% S.F. 2% S.F. November 2018
time period at which to expect a major
bottom in oil prices.

7
 TREASURY BONDS
Bond prices continue their power surge
higher. Although I remain a long term
bond bull into late 2021 / early 2022, in the
near term we might just be nearing the next
intermediate peak.

On the $TYX chart (yield on the 30 year

treasury) below, I have identified a
recurring rhythm averaging 39.8 months
roughly three years and four months. We
are there. My analysis of the daily pattern
points to the June 23/24th time period as the
candidate reversal zone coincident with
my expected low in equities. We could be
in store for lower bond prices meaning
higher interest rates over the course of
the next several months as a result.

39.8 Month Cycles

Derivation: (89 / 5) = 39.8

PRECIOUS METALS
Comex gold continues its countertrend rally. Price is
now flirting with 1,300 once again. I view this surge
back up as a move against the major bear trend very
similar to that which occurred in 1982-1983
following the 1980 major high. My analysis
Similar Patterns suggests this market should continue to head
modestly higher for at least another month before the
downtrend resumes.

The vertical lines on the chart denote a recurring

time span of 96 months. I suspect further data will
reveal the cyclical function at 98.4 months.

THE HARLEY MARKET

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