ST Outlook – 17 March 2012


The big news this week has been that US markets have made “new highs”. This is being peddled by many as a reason to be even more bullish, but as a dyed-in-the-wool contrarian I see this as yet more reason to be cautious and to prepare for a downward move in the market. While there is no rule that states that “what goes up must come down”, Hurst’s Cyclic Principles are all about the cyclical nature of financial markets, and the US markets are unmistakably approaching a peak of at least 40-week, if not 18-month magnitude.

S&P 500

This week two Sentient Trader users (Silent One and Jazabalegui) posted discussions to the forum questioning the magnitude of the March 2009 trough. They present very convincing arguments for a change in the generally held long-term picture of a straddled 54-month cycle trough in August 2007 and the 18-month cycle trough in March 2009. But as Jazabalegui points out, the impact on the short-term analysis is minimal.

The 18-month cycle approaching a peak

Here then is our bigger picture of what is happening in the S&P 500 (e-mini futures data used here), which remains unchanged for the moment. This assumes the phasing of the 54-month cycle trough in October 2011, and the presence of a 6-year “harmonic echo” cycle which formed a trough in March 2009, and implies that the current 18-month cycle has a neutral underlying trend, and is expected to peak soon. Price has entered the potential peaking area, in terms of both level and time, as can be seen in the above chart.

In the short term there are three possibilities. The 20-week cycle trough occurred on 30 January 2012:

20-week cycle trough January 2012

Or the 20-week cycle trough occurred on 6 March 2012:

20 week cycle March 2012

And the third possibility is that the 20-week cycle has not yet occurred. I am not presenting a chart illustrating this because I think it is very unlikely, but it is still a possibility. If the market turns and falls very sharply right now then this alternative will need to be considered more carefully.

As can be seen from the above charts, there is not a great deal of difference between these analyses, except in the subtleties of exact level and timing of the forthcoming peak.

Euro/US Dollar

Last week I pointed out that we were probably in the last 20-day cycle of the first 80-day cycle of the 18-month cycle which troughed in January of this year. Here is that analysis carried forward, with a probable 10-day cycle trough forming this week:

Looking for an 80-day cycle trough

I lauded the forex pair’s price movement as being a perfect cyclic picture, and warned that such a situation seldom lasts for long. This week the picture has become slightly hazy as it is possible that the 80-day cycle has formed an early trough already, as is apparent from the 20-day cycle projections above. Here is an alternate analysis that makes the early formation of the 80-day cycle trough even more likely:

An early 80-day cycle trough?

At 62 days it is only 6 days early (the nominal length of the 80-day cycle is 68 days), although the 80-day cycle has recently been “running long” at 92 days, making this scenario less likely. Confirmation of the 80-day cycle trough will be provided by price crossing the FLD’s shown on the chart above.

Gold

17 days have passed since the 20-week cycle peak of 28 February 2012. We are expecting the formation of a 20-day cycle peak, the first in the unfolding 80-day cycle which, as mentioned last week, I am hoping will shed some light on the magnitude of the September 2011 peak.

The medium-term picture

It is possible that the 20-day cycle peak occurred early on Monday 12 March 2012, which was at only 13 days:

An early 20-day cycle peak?

With the 20-day cycle currently running at 21 days, it is more likely that the 20-day cycle peak will form this week, probably above the 20-day FLD and 10-day VTL as shown on this chart, although not necessarily much higher than current levels.

30-Year US Bonds

Bonds finally broke down out of the FLD congestion zone, as they were expected to, allowing Sentient Trader to pin the 20-week cycle peak on 31 January 2012 as surmised previously.

20-week cycle peak

It would seem that a short (28 day long) 40-day cycle peaked on 28 February 2012, showing some commonality with Gold.

Expecting an 80-day cycle trough

We are now looking for an 80-day cycle trough, which should be followed by a move up to the 80-day cycle peak some time in the next three weeks. This would of course be bearish for stocks, and helps to give an idea of the window of time in which to expect a fall in stock prices.

Crude Oil

Displaced 20-week cycle trough

Crude Oil is beating an interesting syncopated rhythm with US stocks and most probably formed a 40-day cycle trough this week on Thursday 15 March 2012 (making that cycle 37 days in length). An interesting phasing analysis subtlety has developed in Crude Oil as can be seen in this chart:

20-week cycle trough on 7 February 2012

The 20-week cycle trough has been displaced by 5 days to 7 February 2012. In JM Hurst’s Cycles Course one of the most complex issues is the correct phasing of “displaced” cycle troughs such as this. Troughs which don’t occur at the lowest price trough, but at a slightly less prominent trough. Why has Sentient Trader displaced this trough? Because of the 20-day cycle that follows the 20-week cycle trough, which would be impossibly long at 27 days if the trough was placed on 2 February 2012, the slightly more prominent price trough. It is satisfying to find a current example of this complex issue.

That concludes this week’s ST Outlook. Take care out there, and don’t be fooled into thinking that a market that has already moved up a great deal will continue to do so!


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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