As the Nasdaq reached its 80-day FLD on Tuesday, and median price settled squarely onto the FLD line my trader instinct was to tighten stops, whereas my analyst instinct was to say “finally the moment of truth!” and I was reminded of the great difference between being a trader and an analyst: as an analyst one strives to be right, whereas a trader’s goal is to be profitable.
Recently we have been considering the correct placement of the 40-week cycle turn in the markets we discuss here, and as an analyst I will continue to consider the evidence until we are able to return a final verdict, but it is worth mentioning that as a trader it is possible to make profitable trading decisions using Hurst’s Cyclic Principles regardless of whether the analysis those decisions are based upon is absolutely “right”. It is this feature of trading on the basis of cycles that has always appealed to me.
The key to profitable trading is to understand what to expect out of a price movement, because that guides the placement of exit stops, and exits are where the profits or losses are made. And so today I am going to start addressing the issue of what to expect as price bounces out of the 40-week turn that we have been discussing in the US markets.
It is important I believe to track several possible analyses in all instruments, and I have been presenting here the most likely analyses as the cyclic picture unfolds. This week one of last week’s possible analyses (with the 40-day cycle trough on 4 June 2012) was eliminated when price crossed the 80-day FLD, creating a contradiction in the placement of the 40-day cycle trough. However another possible analysis which I have been monitoring in the background stepped forward to take its place, with the 80-day cycle trough on 4 June 2012, and the 20-week cycle trough positioned on 6 March 2012 (the position of this 20-week cycle trough we have discussed previously, so I won’t debate it again here).
Here you can see that price has been riding down the 80-day FLD this week, as it did in the Nasdaq (above I mention price crossing the 80-day FLD, yet here it doesn’t. Remember that different analyses result in different FLD levels). This analysis implies several more weeks of downward price movement before the 40-week cycle trough.
The other analysis that I have been presenting places the 40-week cycle trough on 4 June 2012, and it has a more “elegant” look to it (not that elegance always leads to the the truth!)
But before you get all caught up in whether or not the 40-week cycle trough has occurred, let’s take a look at what we are expecting as price bounces out of that trough. The answer to that question is provided by looking at the longer term picture and understanding how this 40-week cycle fits into the bigger picture.
This chart shows the cyclic picture since March 2009. As discussed previously we are now in the third 18-month cycle since the March 2009 trough. I am assuming here that the trough in March 2009 was of at least 54-month magnitude, something which we could debate at length, but let’s work with that assumption for now. There are of course three 18-month cycle troughs in every 54-month cycle, and the shape of those 18-month cycles should follow a pattern of bullish, neutral then bearish. When you add in the effect of longer cycles those patterns could be distorted, to result in a sequence such as very-bullish, fairly-bullish then slightly-bullish: and that is what seems to be playing out in the US markets at the moment.
How do you define the bullishness of a cycle shape? The simplest approach is the one I have used to calculate the percentage of bullishness shown above, which is a measure of how far into the cycle shape the peak develops. As you can see, using this method the first 18-month cycle was 86% bullish, the second 18-month cycle was only 66% bullish, which fits the expected pattern.
And so what do we expect from the third 18-month cycle? We expect it to be less bullish (or more bearish) than the previous cycle, in other words less than 66% bullish. If the progression of “bullishness” is a simple arithmetic one (which it isn’t always), then we might expect this 18-month cycle to be about 46% bullish. Note that a bullish score of less than 50% is actually a bearish cycle shape.
And so I am expecting the current 18-month cycle to have a shape which is not very bullish, and is probably slightly bearish. What does that tell us about what to expect from the next 40-week cycle? I have plotted that expectation on the chart above using dashed white arrows, but the expectation can be expressed simply as a peak lower than the peak at the end of March this year, and an eventual trough which is close to the level (possibly lower than) the trough of October 2011.
In conclusion: as an analyst the identification of the 40-week cycle trough is of great importance (in order to be “right”), but as a trader what is of greater importance is to monitor long positions carefully, and to keep tight stops in place because whether or not the 40-week cycle trough has occurred, the outlook is generally vulnerable to moves to the downside.
In my experience one of two things happen when price encounters an FLD – it either crosses the FLD cleanly with a surge of speed in price, or the FLD provides support or resistance to price, resulting in a brief period of price moving along with that FLD. The Nasdaq this week provided a perfect example of the latter behavior.
In last week’s ST Outlook I pointed out that the 80-day FLD was likely to prove an important test for the Nasdaq in answering the question that we have been mulling over recently: has the trough of the 40-week cycle occurred? If price had soared through the 80-day FLD we would have asserted with confidence that the 40-week trough has been formed in price, but the reverse assertion cannot be made: as price certainly did not soar, we cannot say that the 40-week cycle trough has not yet occurred, all we can say is that it is not yet confirmed. In case you think that price looks as if though it did cross the FLD in the chart above, look at how it interacted with the FLD in this analysis:
Markets have all been moving with a remarkable degree of commonality recently, and this week the Euro also travelled along the 80-day FLD. We are expecting the formation of the 20-day cycle trough about now, but of course the long term picture remains bearish.
Gold had another bad week, and the possibility that the 40-week peak was a miserable affair on 6 June 2012 is growing increasingly likely. Here too I am bearish as you know, and if price drops below the support level around 1525 then I would expect to see the bear exert itself fully.
30 Year US Bonds
There is not much to add to the bond analysis, and so following my mother’s advice that if I didn’t have anything nice to say I should not say anything at all, I will simply present the updated chart:
Oil is approaching the 40-week cycle trough which is now very close. I always enjoy analyzing oil because the cycles are usually very clear.
US Dollar Index
Ths US Dollar put up a fight this week, but I continue to expect a fall in the dollar towards the 20-week cycle trough expected end of June or early July. It is just possible that trough formed on Tuesday this week, but it is unlikely.
Well that’s it for this week. As a matter of interest I should point that there are experienced Hurst analysts who disagree with my bearish outlook for the 40-week cycle presented above. Analysis is a constantly fascinating process and different opinions are very useful in achieving the ultimate goal of finding the truth. For that reason I am delighted to announce that other analysts will be contributing to ST Outlook soon, so look out for their posts.
Speaking of which you can now have all ST Outlook posts emailed to you directly “hot-off-the-press”. Enter your email address, confirm your registration and all future ST Outlooks will be emailed to you directly.