As the S&P 500 and Dow Jones Industrial Average reached up to new highs this week (above their respective highs of September 2012) I was struck again by the dichotomy between analysis and trading. As an analyst I look ahead to determine what is coming next, and build a picture of what the cycles are doing so that I have an idea of the road ahead for the markets. But as a trader I follow simple rules – when price crosses an FLD (Future Line of Demarcation) I take a position (according to the process encapsulated in the FLD Trading Strategy).
Most of the time the two processes work in concert and there is no dichotomy, but recently the two have separated, and while enjoying profits from bullish positions the analyst in me has been growing ever more bearish. There are two analyses that we have been watching in the US markets recently, both of which are bearish – the only points of discussion are really when the move down is going to occur – sooner or later, and how deep the move down will be.
To shed some light on which of the two analyses is most likely to be correct, I find it useful to analyze relative value charts. Here is a chart of the S&P 500 valued in Euro:
This analysis matches the one that I have been tracking here in the S&P 500, and as you can see the S&P 500 did not reach new highs this week from the perspective of someone who values things relative to the Euro (which is perhaps why I am stubbornly continuing to consider this analysis).
A different picture is provided by analyzing the S&P 500 relative to the price of Gold (in US Dollars):
This analysis is of course the alternate that we have been tracking in the Nasdaq, and adds weight to the argument that the 18-month cycle trough occurred in November 2012. It is worth bearing in mind that the current 18-month cycle (in this analysis) is expected to be less bullish than the previous one, which is why the outlook is bearish even if this analysis turns out to be the true one.
Regardless of which analysis triumphs, we are expecting a turn down in the S&P 500. Here is my preferred analysis which requires a hard and sharp move down. If the fall is instead a mild one then I will relinquish this analysis, and focus on the alternate, which we are tracking in the Nasdaq.
As the S&P 500 achieved new highs this week investors generally felt even more bullish (the AAII survey reached over 52% bulls, an historically high level), but as a cyclic analyst the higher the market climbs, the more bearish I feel because the turn down becomes more overdue.
Here is the alternate view, that the 18-month cycle formed a trough in November 2012:
As mentioned above the current 18-month cycle is expected to be less bullish than the previous one, which implies an early peak which could match and possibly exceed the September 2012 peak.
In the Euro there is no dichotomy between analysis and trading. The Euro is tracing out the bullish path that is expected. The peak will form soon, and the Euro will drop into the 40-week cycle trough expected in March this year.
Gold provides an interesting variation on today’s theme. As Gold dropped away from the peak of 17 January 2013 so strongly this week it crossed the 20-day FLD, signalling the entry into a short trade, and clarifying the analysis uncertainty we discussed last week. The peak of 17 January is now phased as the 80-day cycle peak.
30 Year US Bonds
Bonds also fell hard this week, leaving behind a likely 80-day cycle peak which is synchronous with Gold’s 80-day cycle peak. I expected a higher 80-day cycle peak, but the strength of this week’s fall makes that seem unlikely. Bonds are looking very bearish, but the recent 80-day cycle peak looks as if it might prove to be a straddled peak, which implies a symmetrical price move around the peak, and so we could see a strong move up to the 40-week cycle peak expected in April.
I mentioned last week that the 80-day cycle trough in Crude Oil could be a subtle one, and indeed that seems to be the case. In this analysis the 80-day cycle trough is placed on 11 January 2013, but the exact placement of the trough is hard to determine, and it is still possible that it hasn’t formed yet. The M-shape of the current 40-week cycle is very clear. Oil is expected to turn down and complete that shape soon.
US Dollar Index
The US Dollar turned down again this week, and is entering the home straight for the long cycle trough expected in March.
If you find that analysis uncertainty is preventing you from making clear trading decisions then you should consider learning to apply the FLD Trading Strategy – our next course starts this week.
Have a great week, rewarding analyzing and profitable trading!