ST Outlook – 14 April 2012


There are times when the markets behave so perfectly (in cyclic terms) that one can be lulled into thinking that there will be no more surprises. At times like this I am grateful to have friends who call me up to point out (with thinly disguised derision) that I was clearly wrong about a peak in the markets because “look how strongly the market moved up this week!”

This is on Friday morning of course, and I point out that the markets are still below where they were last week, and that the move up is only the expected bounce out of a 40-day cycle trough, but I know there is little point: peaks in the market are always times of blind optimism against which my bearish warnings have little impact. (I didn’t call back on Friday evening, it would have been insensitive).

S&P 500

The US markets fell through the Easter weekend and formed a clear trough on Tuesday 10 April 2012, which is most likely the expected trough of the 40-day cycle. Price then bounced up and rode the 80-day FLD as I suggested it might last week. On Friday the short-lived bounce ended with price back at the 80-day FLD.

Bouncing out of the 40-day cycle trough

There might well be more to this bounce out of the 40 day cycle trough, but it isn’t looking very bullish to me. When the markets are playing according to the rules I like to “keep on my toes” and avoid being lulled into a dangerous complacency by looking critically at the analyis, and in particular the longer term picture. I have been questioning this week the phasing of the 54-month cycle. It is possible, perhaps even likely that the straddled trough of August 2007 is an incorrect phasing, but I am intrigued by the continued validity of this long term phasing which includes a (non-Hurst) six-year cycle as discussed previously. Is it possible that we experienced another straddled 54-month cycle trough in October 2011? That implies a fairly complex interaction between the cycles, and experience tells me that the simpler solution is usually the best one, but the possibility is intriguing, and so here is the chart for your consideration:

Possible long-term phasing

Euro/US Dollar

The Euro has probably formed the 20-day cycle trough discussed last week. This trough might be correctly positioned on 9 April 2012, but trading was light on Monday and the more accurate position for that trough could well turn out to be Thursday 5 April 2012.

The 20-day cycle trough?

Price crept below the 20-week FLD over the Easter weekend, confirming the assertion made last week that we have seen the peak of the current 20-week cycle (despite the fact that this cycle should be “right-translated” as pointed out by Bryan last week). Of course if the above analysis proves to be incorrect, that FLD might well slide over to the right, and thus might not have been crossed at all, but I continue to favor the analysis presented. After forming the probable 20-day trough price bounced back up to the 80-day VTL (which it crossed last week) in typical manner, peaked late on Thursday 12 April 2012 after a disappointing bounce (as also promised last week), and then fell back downwards on Friday, possibly already heading down towards the 40-day cycle trough expected towards the end of April.

Gold

Gold shook off last week’s blues (perhaps cheered up by a drop in the stock market), and climbed up above the 40-day VTL, thereby confirming that we have see the trough of the current 80-day cycle. It should be mostly upwards from here into early May when the 80-day cycle is expected to peak, but I must point out that only 45 days have elapsed since the 20-week cycle peak on 28 February 2012. Cycles run long in gold, and so it is possible that the 40-day cycle peak should not be pinned to the disappointing peak of Monday 2 April 2012 as it is in this chart:

Heading up to the 80-day cycle peak

If the 40-day cycle peak is only occurring now (perhaps it formed on Thursday 12 April 2012), then the aforementioned 40-day VTL has not of course been crossed, and we might still see lower gold prices before that 80-day cycle peak in May this year.

30 Year US Bonds

Forming an 80-day cycle peak

Bonds formed a viable 80-day cycle peak on Tuesday this week, 10 April 2012, and then climbed back up to almost the same level on Friday. Whether the peak has formed, or is yet to do so, prices should fall from the peak, although it might be a subtle drop because this nascent 80-day cycle is expected to have a bullish shape, taking prices higher into the 40-week cycle peak expected towards the end of May, or early June this year.

Crude Oil

Bouncing up from an 80-day cycle trough

Oil formed the expected 80-day cycle trough on Tuesday 10 April 2012, a “perfectly nominal” 68 days after the 20-week cycle trough of 2 February 2012. I warned last week that this 80-day cycle trough wouldn’t be very good news really, and I wouldn’t be surprised if the 20-week VTL provides some resistance to the upwards move.

US Dollar Index

The US Dollar Index is a useful instrument to analyze because the US dollar influences so many other markets. The prices of gold, crude oil (and indirectly US bonds) are quoted in US dollars, and so we are viewing those prices through the filter of the value of the US dollar itself. I will start with the long term analysis (Golden Rule #1):

The US Dollar

I like to analyze the US Dollar with synchronized troughs (the traditional Hurst approach) which works very well, and poses an interesting question: The Euro/US Dollar forex pair is highly inversely correlated to the US Dollar of course, and so if I analyze the Euro/US dollar forex pair with synchronized troughs, surely the US dollar should be analyzed with synchronized peaks? Or vice versa. Well perhaps so, but the “cyclic character” of forex markets is not clearly defined either way (as opposed to stocks which clearly have synchronized troughs, and commodities which have synchronized peaks), and so this remains one of the Hurst riddles that I enjoy considering. I also find it particularly interesting to compare the resultant analyses when both are produced with synchronized troughs. Here is a closer view showing the current situation:

Current situation

As can be seen, this analysis has the US dollar on the downward leg of the third and final 18-month sub-cycle of the current 54-month cycle, which is expected to form a trough near the end of this year, or early next year. Next week we will take a look at the detail.

Good trading everyone, and may the cycles be with you!


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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