ST Outlook 14 July 2012


The greatest benefit of analyzing financial markets according to cyclic principles is the insight that it provides in terms of what to expect and when to expect it. Sometimes the market suprises us, and sometimes of course our analysis is wrong, but a good deal of the time the markets behave as they did this week – exactly as expected. ┬áThis provides us with an opportunity to stop analyzing, and to think carefully about what exactly the implications of the analysis are.

S&P 500

Last week we were expecting the US markets to fall into the 40-day cycle trough, which looks as if it was formed on Thursday 12 July 2012.

Bouncing out of the 40-day cycle trough

And so what are the implications? The shape of the cycle since the trough on 4 June 2012 is bullish (a late peak and higher closing trough), but not as bullish as one might expect for the first 40-day cycle following the trough of a 40-week cycle. In previous ST Outlooks I have discussed why this is, but what should we expect now? We should expect a less bullish shape for the next 40-day cycle. I will be expecting an earlier peak, which will probably surpass the 1375 high of 5 July 2012, but it might not.

Nasdaq

The Nasdaq is in a very similar position, probably bouncing out of the 40-day cycle. We expect an early peak here as well, as a less bullish 40-day cycle plays out.

An imperfect 40-day cycle

Euro/US Dollar

The Euro is also needing to form a 40-day trough about now (and might have done so on Friday 13 July 2012). As discussed last week there are two possible analyses. Here is the first:

Bouncing out of a 40-day cycle trough?

This places the 20-week cycle trough (see the ST Outlook of 16 June 2012 for alternative magnitudes for this trough) on 1 June 2012. The 40-day cycle now forming its closing trough has a very bearish shape, and if this analysis is correct the implication of the analysis is very bearish: because the next 40-day cycle is expected to be even more bearish in shape.

The other possible analysis is less bearish, and offers a glimmer of hope for the Euro:

Or a late 20-week cycle trough?

This analysis embraces the 40-day cycle now closing (forming its trough) as the final leg of the 20-week cycle (or other magnitude – see the ST Outlook of 16 June 2012), which implies that the trough forming now is of 20-week magnitude (or greater – ibid.). The implication of this is a greater bounce for the Euro. I will be watching the bounce carefully, and if it manifests more bullishness than the previous 40-day cycle then this analysis will become the preferred one.

Gold

Gold continues to play within the tightening bounds of a triangular formation, providing no clear indication of whether the 40-week cycle has formed its peak yet or not. I remain bearish in the long term for gold, but there is some near-term bullish potential if gold manages to break upwards out of the triangle. It will either form a late 40-week cycle peak, then resume its downward slide, or it might extend further upwards, leaving behind a straddled 40-week cycle peak as discussed previously.

Long cycles or a straddled 40-week cycle peak?

30 Year US Bonds

Approaching a 40-day peak

Bonds are forming a 40-day cycle peak, which if it manages to exceed the 4 June 2012 peak might claim the 18-month title.

Crude Oil

For the past two weeks we have been discussing the formation of the 40-week cycle trough at the end of June, now let’s look at the implications of that trough. First of all here is a long term picture on which I have marked the 18-month cycle shapes:

Progressively less bullish 18-month cycles

They are exhibiting the expected progression of diminishing bullishness. The next 40-week cycle is expected to have a bearish shape if this picture remains true.

Expecting a bearish 40-week cycle

What is the implication of a bearish 40-week cycle? As indicated on the above chart, we should expect an early peak, lower than the peak at the end of February, followed by a move down to a trough lower than the recent trough at the end of June, and lower than the trough of October 2011.

US Dollar Index

The US Dollar struggled up to a new peak this week. Next we expect the Dollar to fall into the 20-week cycle expected towards the end of the month, or in early August. It is not impossible, as mentioned last week that the 20-week cycle trough has occurred already, but I coninue to think that this is the less likely possibility.

Looking for the 20-week cycle trough

That’s it for this week. As most markets bounce out of their 40-day (at least) cycle troughs I am bullish, but perhaps cautiously bullish would be a more accurate description, as I watch warily for the signs of bearish cycle shapes. That would be an indication that the bear is resuming control.


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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