Ballad of an Insignificant Trough – 29 September 2012 6


Last week I discussed the likelihood of the formation of a trough in the US markets, a pause as they resignedly join the world trend and turn downwards. The drop early this week confirmed that the markets are turning down, and then the bounce back up on Thursday formed a possible trough. But on Friday the markets failed to hold on to their gains as the Dow Industrials fell to a new low, and the S&P 500 and Nasdaq gave back most of Thursday’s rise.

Whether or not the trough we are expecting has occurred could be debated (and will be!), but one thing is certain: the markets have become fractured, and I would suggest that trying too hard to identify the trough might be futile. Pin-pointing troughs in a falling market might give one a personal sense of satisfaction, but it is a bit like stepping in front of a moving train: the train is unlikely to notice. Hence today’s title: the trough is likely to be insignificant against the bigger picture of the falling market (with apologies to the makers of “The Ballad of the Sad Cafe”, whose title I have brazenly plagiarized).

S&P 500

What do I mean by an insignificant trough? One of the analyses we have been tracking in the S&P 500 has that trough as a trough of the 20-week cycle. Here it is:

A 20-week cycle trough

If this analysis proves to be correct then the 20-week cycle trough will probably turn out to be a straddled trough, which results in price tracing out a fairly symmetrical M-shape. One of the biggest misconceptions that one needs to let go of when embracing Hurst’s Cyclic Principles is the idea that a 20-week cycle (or any cycle) trough means that prices are going to rise for about half that cycle’s wavelength. Cycle shapes are imbalanced most of the time (because underlying trend is more often bullish or bearish than it is neutral).

If this trough is of 20-week magnitude then I would expect the bounce out of it to last only a few weeks, creating a symmetrical M-shape. And that is what I mean by an insignificant trough.

The alternate option that we have been watching implies that this trough is of only 20 or 40-day strength:

A smaller trough

Notice how staggered the future trough positions (marked by the “circle and whiskers”) are becoming. As I pointed out last week this does not invalidate this analysis, but in my opinion it does lower the likelihood of this being the true analysis. Here too the impending trough will be “insignificant” because it is a shorter cycle trough occurring against the backdrop of a falling 20-week cycle.

Price was supported by the 40-day FLD this week (the blue line on the chart), but it would require a strong bounce up next week to keep above the FLD and so I expect to see it broken to the downside.

Nasdaq

The trough is looking doomed to insignificance in the Nasdaq as well, as it is probably of only 20-day magnitude. Price bounced off the 80-day FLD (the cyan line) this week in the Nasdaq, but it should fall below the 20-week FLD (the green line) before forming the 20-week cycle trough some time in October or early November.

A 20-day cycle trough

As a matter of interest I have been discussing the Nasdaq and S&P 500 analyses as being pretty much interchangable, but as the cycles play out differences are emerging, and the markets are beginning to assert their individuality again. This is something that happens most commonly around peaks, and is yet another warning that we are not seeing the emergence of a new bull market.

Euro/US Dollar

I pretty much said all that I have to say about the Euro on Thursday (if you didn’t get that by email, make sure you subscribe to the feed-burner email thingummy which delivers these posts to you). As a potential trough formed on Thursday I held onto my short positions, because this trough is likely a trough of only 20-day magnitude on the wrong side of a falling 80-day cycle, and so not very significant.

A 20-day cycle trough

Gold

We are expecting Gold to form the 40-week cycle peak. It has possibly done so, but I wouldn’t be surprised to see another upward stab. It has been 388 days since the September 2011 peak (see the bar count on the chart), and so this peak is now certainly overdue.

Sticking to the 10-day FLD

Gold has formed a temporary attachment with the 10-day FLD (the pink line on the chart). This is something that one often sees, but there are two things about Gold’s dance with this FLD that strike a bearish chord:

  • On Wednesday price almost broke free below the FLD. It “took the curve wide”, but then snapped back up on Thursday, only just managing to stay on the FLD “road”. This indicates a propensity to moving downwards.
  • Then on Friday, having been pulled back up by the FLD it didn’t manage to break free. Sometimes FLD’s work a bit like slingshots: after some time tracking along the FLD, price is launched from the FLD and travels away from it. That this failed to happen is a bearish message.

As mentioned I wouldn’t be surprised to see a higher price in Gold, but the bearish cracks are appearing.

30 Year US Bonds

Ah Bonds … the US bonds continue to etch out such perfect cycle shapes that I’m going to have to include them in the textbook (when I get around to writing it). They should experience a peak of 20-day strength and then climb further to the 80-day cycle peak, leaving a perfect W-shaped cycle.

A 20-day cycle peak

Of course markets, like three-year old children, cannot seem to keep up such good behavior for very long.

Crude Oil

Of all our insignificant troughs this week Crude Oil stands the best chance of having produced a trough of some significance. As discussed last week the 80-day cycle trough might be forming now:

An 80-day cycle trough

I present this analysis because in these dark bearish days oil offers the most hope, but you will know that we have been watching an analysis in oil that matches the US market analysis with the 80-day cycle trough in early September (note that staggered nest-of-lows at the foot of the chart). I will be watching how oil handles this trough very carefully: if there are signs of weakness then that 80-day cycle trough will have to move back to September, making it a good example of a straddled trough, and we’re in for lower oil prices through to the end of the year. Our glimmer of bullish hope will turn out to have been a mirage.

US Dollar Index

Of course there is another glimmer of hope: last week I suggested that the US Dollar was rising out of a 20-week cycle trough, and this week’s price action confirms that.

A 20-day peak

The insignificant troughs that I have been discussing would show as a peak in the US Dollar of course, and so our ballad to their insignificance ends neatly with the most insignificant of all – the possible 20-day peak which formed in the Dollar this week. (Of course it might yet form next week, but that would spoil the story and for an inveterate filmmaker like me, story must take precedence)

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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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6 thoughts on “Ballad of an Insignificant Trough – 29 September 2012

    • David Hickson Post author

      Hi Matt
      Yes the Dow is better represented by the S&P 500 than by the Nasdaq. The Nasdaq exchange is for generally hi-tech, computer stocks whereas both the Dow and S&P 500 are “regular” stocks, although different collections of those stocks. I am thinking of including the Dow, but it is usually so similar to the S&P 500 that there seems little point. This week is unusual in that the DJIA fell to new lows on Friday whereas the S&P 500 didn’t: which is what I mean by a fractured market.

  • Damo

    Great Analysis as always David! :-)

    From the way you describe how a peak is formed they are very complex. You are Running a Daily Analysis and looking at 40-week, 20-week and 40 day and 20-day to build a longer term picture – would this be correct?

    Just trying to establish the correct way to look at the bigger longer term picture to make sure my Analysis would be correct.

    Keep up the good work! :-)

    • David Hickson Post author

      Thanks Damo
      Yes I am using daily data in this analysis. In fact I am looking at all the cycles in the nominal model, which includes the cycles you mention, as well as the 18-month and 54-month cycles, although they provide more of a background. The nominal model is explained in further detail in our learning zone and also in the fourth video on this page.
      One of the challenges of working with Hurst’s Cyclic Principles is keeping a handle on all the cycles at the same time, because in some ways that is what it is all about. Troughs in the stock market are synchronized, and so when you identify an 18-month trough you have also identified the trough in all cycles shorter than 18 months. But peaks are not synchronized which is why they are complicated, and the process of forming a peak is so often drawn out over some time.
      As an analyst one needs to look at all the cycles working together. As a trader one has to learn to focus on one of them and see how that cycle is influenced by the others.
      David

  • Jeffrey Young

    David,

    I analyze the markets daily and this week I came upon something interesting. The cluster of circle and whiskers for the 40 day trough seemed to move from Tuesday when it was indicating an approximate October 4th low and then it seemed to have shifted the next day (Wednesday) into the September 24th-28th time frame. Then on Thursday shifted back into the October 4th area. Now after Friday’s close it shifted back again into late September. Is this usual? I have been using the software for several weeks and that was the first occurance I saw that happening.

    I have another question as well. What is the best amount of data to use to form ones analysis. I am using Metastock and asked for data back to 1997. Is there a best point touse because I notice things shift around a bit if I pick different troughs to pin the analysis off of. Should I do a certain amount of data based on the cycle length? The book I am reading by Chris Grafton seems to suggest using 200-250 points of data but I was not comfortable with that when I saw the results. You will be getting quite a bit of participation from me here because I was about to write asking where I could post questions about the weekly analysis. Just want to say that this software is awesome and I don’t even know 1/100th of what it can do. Thank you!