Of Straight Lines & Cycles – 27 April 2013


A curve can be made up of a number of straight lines, and the same is true of the cycles in financial markets. The length of the straight lines that make up the curved cycles we identify in the price movement can be of any length – as short as a 1 minute bar, or as long as several months (possibly even years).

The latter situation develops when there is a dominant cycle which is overpowering the shorter cycles, and is a theme that I have been developing upon since the beginning of this year. The important thing to remember is that price movements are cyclical, and that eventually the straight line movement will end, and prices will turn.

Identifying the end of the straight line movement can prove to be challenging, but there are several signs that a cyclic analyst looks out for, the clearest of which is the development of a straddled trough: A trough that seems insignificant given its magnitude. Price action surrounding a straddled trough is often fairly symmetrical, leading to the classic M-shape that cycles describe, with a shallow center trough, and a double-top.

Such a shape is forming now in the US markets. It is still not confirmed but the warning signs are there, indicating that the straight line bullish move we have enjoyed for the past 4 months is likely coming to an end.

S&P 500

The trough of Thursday 18 April in the S&P 500 could be a trough of the 20-week cycle as shown in this chart:

A recent 20-week cycle trough

It is undoubtedly a subtle trough (see the discussion on subtle, straddled and hidden troughs), and may very well develop into a straddled trough, with very bearish implications.

The alternate analysis phases the 20-week cycle trough at the end of February, in which case the trough of 18 April is most likely a trough of the 20-day cycle, and so it does not qualify as a straddled trough, but it does imply that the market has turned, and the implications are also bearish, although not as strongly bearish:

Syncopated beats

Nasdaq

Exactly the same two analyses apply to the Nasdaq. Here is the potentially straddled 20-week cycle trough: 

Recent 20-week cycle trough

And here is the alternate:

A 40-week dominant cycle

Both analyses show the 40-week nest-of-lows at the end of June, and I would not be surprised to see a strong move down into that 40-week cycle trough. 

Euro/US Dollar

The Euro/US Dollar forex pair has been bouncing out of the 40-week cycle trough, and probably formed the first 20-day cycle trough this week. Note the two month long straight line move down into the 40-week cycle trough. All straight line moves do eventually end as the market turns. 

First 20-day cycle trough following the 40-week cycle trough

Gold

Gold has been bouncing out of the mid April trough. It is expected to form an 80-day cycle peak now, and should reach up to the 40-week cycle peak some time in June. 

Bouncing up to the 80-day cycle peak

30 Year US Bonds

Bonds struggled a little higher this week as they form the 40-week cycle peak which is expected now. 

40-week cycle peak expected

Crude Oil

Crude Oil has bounced strongly over the past 10 days, forming a more likely 18-month cycle trough. The move down into that trough, and the bounce out of it have the strength we would expect from a trough of that magnitude. 

A strong bounce

US Dollar Index

The 80-day cycle trough in the US Dollar was expected to be a subtle trough as discussed recently, and it is looking as if it might be developing into a straddled trough, indicating that the Dollar will be falling fairly hard into the 20-week cycle trough expected towards the end of June. 

An 80-day straddled trough?

Dominant cycles can have the effect of lulling investors into a false sense of confidence in the concept that the current move will continue. But when they turn they generally do so with some alacrity. I have often been grateful for the warning signs that a good Hurst cyclic analysis provides.

Have a great week and profitable trading!


About David Hickson

I have been trading for over 20 years, but only had any success after discovering Hurst's cyclic principles. Unable to find any software to speed up the analysis process I created Sentient Trader software, which now pretty much does all the analysis for me. I am a film maker and a TV director, but nowadays I mostly provide consultation services to professional traders and fund managers, helping them to integrate Hurst analysis into their trading. I'm South African and live with my family in Italy.

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