Analyzing financial markets according to Hurst’s cyclic principles is a constantly fascinating (and rewarding) process. There are times when the cyclic picture is so clear that it seems too good to be true. At those times I remind myself that the markets are not only cyclical but also constantly surprising, and that one should expect the unexpected.
How does that make sense, given my assertion that the cycles are currently fairly clear? Experience has taught me that “the surprise” usually manifests in terms of the amplitude and/or speed of a move. We can be confident about the position of a trough, a little less confident about the position of a peak, and the surprise is likely to come in terms of the extent and speed of a price move. With this in mind I continue to be wary of the bearish potential of the stock markets at the moment.
The US stock markets have been struggling upwards since the trough of 10 April 2012 which I still mark as a trough of the 40-day cycle. The fact that the bounce out of the 40-day cycle has been so labored is a bearish sign. One can practically see the bullishness of the 40-day cycle encountering the bearish influences of the longer cycles, causing a tug-of-war which has resulted in the directionless movement of the past two weeks. Last weekend the 80-day FLD was crossed, indicating that we have seen the peak of the current 80-day cycle. Soon (if not already on this Thursday, 19 April 2012) the 40-day cycle will be turning bearish, and price will head down to the 80-day cycle trough expected by the end of May.
The Euro/US Dollar forex pair formed a fairly well-defined trough this Monday, 16 April 2012, which seems likely to be a trough of the 40-day cycle, pushing the trough of the 20-day cycle back to a straddled trough position on 29 March 2012. The current move up is expected to form an early peak, and then the Euro will resume its downward slide (relative to the US Dollar) towards the 80-day cycle trough still expected in late May or early June.
The exact position of the 40-day cycle peak in gold is still open to debate. I present here the most likely phasing in my opinion, but the peak formed on Thursday 12 April 2012 might still prove to be the correct placement. Either way price is moving down now to form the current 40-day cycle trough before climbing to the expected 80-day cycle peak some time at the end of May or in early June.
30 Year US Bonds
Of all the markets we are tracking in ST Outlook, the bond market is presently the one with the least clarity. The continued rise in prices could mean that the 80-day cycle peak has not yet formed in price, or it is possible that the 80-day cycle peak proved to be a subtle peak as suggested last week, on 10 April 2012. If the former alternative proves to be the case then the positioning of the shorter cycle peaks is not very satisfactory. Either way the current situation in bonds continues to raise a bearish warning flag for stocks.
Oil continues to beat with a reliable Hurst rhythm. The current rise out of the 80-day cycle trough on 10 April 2012 is looking suitably tired given the bearish underlying trend.
Price has crossed the 40-day FLD, bolstering confidence in the positioning of the 80-day cycle trough, but it is always sensible to remain aware of alternative phasings, and it is not impossible that the 80-day cycle has yet to form a trough, although that scenario is becoming less likely as price struggles upwards.
US Dollar Index
Last week I introduced the long term picture for the US Dollar. Here is a reminder, showing us that the Dollar is heading down towards an 18-month cycle trough:
In the near-term we can see the dollar heading down towards a 20-day cycle trough, following the 40-day cycle trough of 4 April 2012. The cyclic picture looks particularly clear, with price crossing the 80-day FLD this week, indicating that the dollar has seen its highest level until the 80-day cycle trough expected towards the end of May.
That’s it for this week. Good trading everyone, and may the cycles be with you!