ST Outlook – 1 September 2012


The US markets are in the process of forming a peak of nine-month magnitude and last week we identified the peak of Tuesday 21 August 2012 as a likely candidate for the actual peak in the S&P 500. This week the markets did nothing to suggest that we should reconsider that assertion, in fact they did very little at all, except to demonstrate yet again that fundamental events do not move the market, but do cause unusual volatility, as we witnessed on Friday because of Ben Bernanke’s Jackson Hole speech.

In fact the market’s reaction to Bernanke’s speech provides a perfect example of what I mean by “fundamental events don’t move the market”. I mean in particular that fundamental events don’t cause financial markets to change direction. Before we discuss the markets this week, let’s take a close look at what happened yesterday.

First of all here is the British Telegraph’s financial headline for today, 1 September 2012:

British Telegraph headline

I am sure that you will be able to find similar headlines in your own local newspapers, on TV, the internet and so forth. Notice the cause and effect relationship that is expressed in the headline:

  • CAUSE: Bernanke’s Jackson Hole speech
  • EFFECT: Markets rise

That is always the case. The media exists I suppose to help us understand our world, and so they have to give us a reason for everything that happens. We are bombarded with this “understanding” of financial markets every day, and it has become a personal mission of mine to undo the damage done by this (complete lack of) understanding. Let me demonstrate by showing you the facts. Here is a 5 minute chart (each bar represents 5 minutes of trading) of the S&P 500 futures contract from yesterday:

S&P 500 futures prices yesterday

I have marked with a yellow line the “overnight session”: trading that occurred before the traditional markets opened. I have also shown where Bernanke’s speech started. The time zone of the chart is UTC. In case you cannot see that clearly enough, here is a close-up:

Zooming in on the action

That downward pointing arrow indicates the time at which Bernanke’s speech started.

Now, call me cynical, but can you see any truth in the headline that “Markets rise on Ben Bernanke’s Jackson Hole speech”?

It seems to me that the markets did a whole lot of rising before the speech, they suffered some volatility during the speech by spiking down, then bouncing straight back up to where they were. They then went ahead to form the second peak of the 1-day cycle (a perfect M-shape if you block out the downwards spike during the speech), and then ended the day lower than the level they were at before the speech.

Perhaps you would argue that clever traders knew what the speech would reveal, and the higher close (higher than Thursday’s close) can therefore still be attributed to Bernanke’s speech, even though the rise happened before the speech. Well perhaps … (or perhaps the clever traders were watching the cycles?)

I’ll leave you to draw your own conclusions about the validity of the media’s generally held belief that fundamental events cause financial markets to move, or change direction.

S&P 500

I mentioned that this week the markets “did very little”. This surprised some people, who expected that having identified a peak in the markets we would witness an immediate fall in prices. I must remind you that peaks are not the same as troughs in the stock market (because of  Hurst’s Cyclic Principles). Whereas troughs are generally sharp and isolated, peaks are complicated, and often clustered together. This week’s behavior was absolutely in line with a market that is in the process of forming a peak.

Whereas the markets appeared to “do very little” in that there were no big dramatic moves, the market did in fact do something very important. The S&P 500 price tracked along beneath the 20-day FLD. That might not sound important, but I believe it is. I would like to introduce you to an FLD-Price interaction that I call the “Triple-Cross Point”. Here are the features of a Triple-Cross Point:

  • Price, while forming the second peak of an M-shape, tracks along (usually beneath) an FLD which is echoing the first peak of the M-shape.
  • The FLD of one cycle longer approaches from beneath price and crosses both the price and the FLD, creating a triple-cross (between price and two FLD’s).
  • Following the triple-cross point the two FLD’s “travel together”, often almost lying on top of one another.

The implications of a triple-cross are bearish. It always marks the start of a strong move down, if price completes the cross.

There are other details and subtleties that I won’t go into here, but the importance of the S&P 500 tracking the 20-day FLD is because a potential triple cross is shaping up in the S&P 500:

A potential triple-cross

That potential triple-cross might occur on Sunday night. The US markets are closed on Monday, and so we won’t actually witness it, but it is something to be aware of.

As a matter of interest, if the triple cross does not occur, and price does not cross down below those FLD’s, then it will be in a position to track along the 40-day FLD. If it does that in a well-behaved manner, then a further triple cross potential will present itself in about two weeks time (as you can see on the above chart – look at the 80-day and 40-day FLD’s).

Having introduced you to the concept of a triple-cross point, see if you can see one shaping up in this longer term chart of the S&P 500:

A longer term triple-cross potential

Nasdaq

Often one can focus so hard on a particular cycle trough or peak that one forgets to consider all the other cycles that are ticking away in the markets. Here is the analysis that we’ve been favoring in the Nasdaq for some time: 

Looking for the 40-day cycle trough

A 40-day cycle trough is due about now, and it is important to remember that even if the market has peaked, it does not move in straight lines, and there will be significant bounces on the way down.

Euro/US Dollar

We have been expecting the Euro to come down to form a 40-day cycle trough, and it did drop to a low on Tuesday this week, but that trough looks too subtle to be a trough of 40-day magnitude, and so I still expect more of a downwards move.

A spring in the Euro's step

If there is some follow-through to Friday’s spike up next week then this cycle shape will change from kind-of-bullish to bullish, and soon we can address again the issue of the magnitude of the trough on 24 July 2012, which we have discussed previously.

Gold

Last week I suggested a minimum target of $1700 for gold, and on Friday gold reached a point only $4.50 short of that:

Reaching for the 40-week peak

I still think gold can break the $1700 level, but the 40-week peak looms near.

30 Year US Bonds

Bonds continued their climb to the 40-day cycle peak, which is expected now. Bear in mind that peaks in bonds are similar to troughs in stocks: sharp and isolated.

Bursting up to the 40-day cycle peak

Crude Oil

Crude Oil fell as expected this week, and it did something else that was interesting: it bounced back up to the 20-day cycle FLD, mimicking the S&P 500’s triple-cross setup. Oil will trade on Monday, and it should give us a clue as to the resolution of the triple-cross setup in the S&P 500. 

Another triple-cross point anyone?

US Dollar Index

Last week I presented an analysis for the US Dollar that positioned the 20-week cycle trough in June of this year:

20-week cycle trough in June 2012

 That implies that the dollar is heading down to an 80-day cycle trough. The other option that we’ve been discussing here is that the trough in June was of only 80-day magnitude:

80-day cycle trough in June 2012

That implies that price is now falling into a trough of 20-week magnitude. Some people find it disconcerting to have two possible analyses, but I always argue that one of the greatest things about performing a Hurst analysis is that you are given tremendous insight into the markets: you know when they are going to turn. The only difference between most analyses is a matter of degree. In this case we are not sure whether the bounce will be of 20-week magnitude or 80-day magnitude, but we do know there will be a bounce, and can trade that bounce very effectively. Both analyses are bearish in the medium term.

That’s it for this week. If you find concepts such as the triple-cross point interesting make sure that you are on our Sentient Trader email list so that you keep in touch with the work we are doing to explore and extend the analysis and trading of financial markets using Hurst’s Cyclic Principles.


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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