The ratios between the wavelengths of the cycles in Hurst’s Nominal Cyclic Model are mostly 2:1, in other words each longer cycle in the model has a wavelength twice as long as the cycle shorter than it (with the exception of the 18-month to 54-month ratio). The result is that each cycle consists of two full cycles of the shorter cycle. Of these two cycles usually the first one is more bullish in shape than the second one (because of the influence of the longer cycle), and the second cycle I find it useful to think of as the “downward cycle” because it will carry price down to the trough of the longer cycle.
Last week we were considering the formation of a 40-day cycle trough in most of the markets I discuss here, and now we are entering into the next 40-day cycle, which is the downward cycle of the current 80-day cycle. It is worth noting that often the downward cycle shows some symmetry with the upward cycle, which in many markets would indicate that we are in for some strongly bearish price action.
It is possible that the S&P 500 is only forming the 40-day cycle trough now, in which case we will see the next 40-day cycle bouncing back up to the region of the recent highs, before dropping hard into the 80-day cycle trough expected in about a month. But there is a more bearish possibility: that the 40-day cycle trough formed on 23 May, and that the bounce we saw this past Tuesday was all the 40-day cycle had in it, in which case the hard drop into the 80-day cycle trough is already upon us. Notice how the 20-day FLD (the purple line) provided resistance to price on Friday – that is a bearish omen in itself.
The Nasdaq is in a similar situation, but there is a subtle difference because of the way price has been interacting with the 20-day FLD. Unlike the S&P 500 it crossed cleanly below the FLD (whereas the S&P 500 tracked along the FLD until Tuesday this past week). And then this week it crossed above the FLD (not very cleanly) and then ended the week below the FLD again. That cross over the FLD is what we expect following the 40-day cycle trough, and so it seems likely that the trough has occurred, and that we have already seen the best of the current “downward cycle”.
The Euro formed the 40-day cycle a week earlier, and so we are already two weeks into the downward cycle. It might yet form a higher peak, but the focus of a downward cycle is of course on the move down to the longer (in this case 80-day) cycle trough, which is expected towards the end of June.
For some time I have been expecting a disappointing 40-week cycle peak in May in Gold. There is no evidence that peak has formed yet, but it will soon, and it is certainly looking pretty disappointing. Of course because I analyze Gold “upside down” the downward cycle here would be less bearish than the previous one, as opposed to less bullish, and that is certainly the case.
30 Year US Bonds
Bonds are an example of an exception to the rule – note how the second 20-week cycle of the 40-week cycle which played out from July 2012 to May 2013 is actually more bearish than the first 20-week cycle. When that happens it indicates that the longer cycles are skewing things (downwards in this case), and that they are gaining in strength.
Crude Oil looks as if it is fairly well into the downward 40-day cycle. It is not impossible that the 40-day cycle trough is only occurring now (similar to the possibility in the S&P 500), but in my opinion (and Sentient Trader’s) that is less likely because following a big magnitude cycle trough such as that which occurred in April we would expect cycle troughs to occur early rather than late. If oil did bounce up strongly now then we would need to reconsider the magnitude of that April trough.
US Dollar Index
The US Dollar has been exhibiting very clear cycle shapes recently, but is beating with a syncopated rhythm, and is only forming the 40-day cycle trough now. The next 40-day cycle is expected to be a “downward cycle”.
If you didn’t get a chance to view my talk on the Traders World Online Expo, it is not too late – the expo runs for another five weeks, and it is possible to view the talks from previous weeks.
Have a great week and profitable trading!