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Let’s take a look at the markets.
One of the basic tenets of Hurst’s Cyclic Principles is that many cycles combine to influence the price movement. In particular the combined effect of longer cycles (which is called underlying trend) will influence how far price moves will extend and for how long. For instance if the underlying trend is bullish, one can expect peaks to occur higher and later.
The terms “higher” and “later” are unsatisfactorily vague, and so I find it useful to calculate a number which represents the “bullishness” of a cycle. This number is a percentage: 50% is a completely neutral cycle shape in that it is neither bullish nor bearish. Above 50% is a bullish cycle, and below 50% is a bearish cycle.
Because of the harmonic ratios between the cycle wavelengths in the cyclic model that we use to understand the markets, there is usually a simple sequence to the bullishness of a particular cycle. For instance when bouncing out of a trough which is synchronous with a much longer cycle trough the bullishness is likely to be very high. The next cycle is likely to be less bullish.
One can generally guess at the expected bullishness of a cycle by looking at the magnitude of the cycle trough that forms the starting point for the cycle move. This is by no means an exact science, but I find it useful to help me understand when and where market turns are likely to occur, particularly when the turn is a peak (peaks are notoriously difficult to predict).
Here are the bullish measures for the 40-week cycle:
Notice that the cycle bouncing out of the 54-month cycle trough of October 2011 (this could be debated of course …) had a bullishness of 75%. The next cycle was, as expected, less bullish at 65%. The fact that both of these cycles were bullish (above 50%) is one of the reasons that I believe the October 2011 trough was of 54-month magnitude.
What does this tell us about what to expect now? The current 40-week cycle is bouncing out of the 18-month cycle trough of November 2012, a lesser magnitude trough than that of October 2011, and so we expect it to have a lower bullishness. The exact bullishness can only be measured once the cycle completes, but if a peak forms now in the S&P 500 the bullishness will be about 71%, and so I expect the 40-week cycle to peak soon.
Here are the bullish measures for the 40-week cycle in the Nasdaq:
Here too we expect the current 40-week cycle to have a bullishness of less than 79%. The current estimate is at 70%, indicating a peak is approaching, but I have not been surprised to see the Nasdaq outperform the S&P 500 recently – it can afford to be more bullish.
These are the bullish measures of the 20-week cycle in the Euro / US Dollar pair:
Note the 62% bounce out of the 18-month cycle trough of July 2012, then as expected a less bullish cycle at 55%. Price is falling now into the 40-day cycle trough as discussed previously, a move that has been fairly strong. The reason for this bearish strength is that the longer cycles are turning down, and the current 20-week cycle is expected to have a bullishness of less than 62%, and could very possibly be a bearish cycle with a rating of less than 50%, carrying prices lower than the recent 40-week cycle trough in April.
The analysis I perform on Gold is inverted, with synchronized peaks, and so the figures here are for a bearishness rating: the higher the number the more bearish is the cycle. Here is the bearishness of the 40-week cycle:
The sequence of 66% – 42% was as expected following the 54-month (at least) cycle peak of September 2011, but the recent drop has produced a more bearish cycle than expected, currently at about 77% bearishness. It does suggest that much longer cycles have turned bearish in Gold.
30 Year US Bonds
Bonds are showing an imperfect progression of bearishness in the 20-week cycle following the 18-month peak of July 2012:
Price is now falling away from the 40-week cycle peak, and it is showing some enthusiastic bearishness, which is likely to at least match the previous cycle’s level.
Crude Oil is bouncing out of a big magnitude trough, of at least 18-month strength. Here are the bullish ratings for the 20-week cycle:
The current 20-week cycle is expected to be a bullish one, with a rating of greater than 62%.
US Dollar Index
The US Dollar is bouncing out of the 80-day cycle trough that we have been discussing here. These are the bullish ratings for the 40-day cycle:
The combination of a bullish (81%) and bearish (32%) cycle is very common. The current 40-day cycle is not expected to be as bullish as 81%.
Have a great week, and profitable trading!