ST Outlook – 21 July 2012


Perhaps one of the greatest “a-ha” moments for me (and I’m not talking about the Norwegian band – I was going to use the word “epiphanies” but that sounded a bit religious) … one of the greatest “a-ha” moments in understanding Hurst’s cyclic principles came when I realized the importance of how multiple cycles work together. There is a tendency for most people (myself included) to simplify things in order to understand them, and when it comes to cycles in financial markets that is a disaster. Because cycles do not work in isolation, markets move because of multiple cycles all acting simultaneously.

This week might have provided an example of the dangers of considering only one cycle. Last week I suggested that the markets were turning from a 40-day cycle trough (or peak for some markets), and this week that continues to appear to be exactly what is happening. So where is the danger? The danger is that many people assume that if the market is rising out of a 40-day cycle trough it should rise for about 20 days before turning back down again. By considering only one cycle they are not prepared for cycle shapes that seem “abnormal”. I have been warning for many weeks about the bearish potential ahead, and that of course implies early (and unimpressive) peaks. When price reached up to the level of the previous 40-day cycle peaks in the US markets this week I started preparing for the peak to form. This might seem premature, but given the bearish outlook I have described in previous weeks, I think it is best to err on the side of caution. Time will tell of course, but it is always best to be prepared.

S&P 500

As prices struggle upwards from the 40-week cycle trough of 4 June 2012, it is sensible I believe to prepare ourselves for the approaching peak. Here is the medium term picture:

The medium term picture

And here is the short term picture. Below price I have plotted the “M” shape that I would expect from the current 80-day cycle. You can see why I think the current 40-day cycle trough might have formed.

A marginally bullish 80-day cycle

Nasdaq

 Looking ahead to the 80-day cycle trough

The picture is very much the same in the Nasdaq. In the above chart I have displayed the 80-day cycle FLD, and the bar counts indicate we have 3-4 weeks before the 80-day cycle trough.

Euro/US Dollar

The Euro formed a deceptive trough last Friday, but then spent the whole week bouncing up and down in such a corrective manner that it was not a great surprise when price fell to new lows this Friday. There remain two options, as discussed last week. My preferred option is this:

 Bearish the Euro

That is of course a very bearish picture, because the recent 40-day cycle should have been bullish according to the information we have available on the chart – clearly there is a great deal of very bearish pressure from cycles longer than those shown on the chart. The less likely option in my opinion is less bearish, but is possible:

 Less bearish, less likely

Gold

There is nothing new to add with regard to gold, which is still trapped within its triangle:

 Trapped in a triangle

30 Year US Bonds

Bonds most likely formed their 40-day cycle peak on Monday this week, 16 July 2012, leaving in place a very neutral-shaped 40-day cycle.

 A neutral cycle

Crude Oil

Crude Oil is bouncing out of the 40-week cycle trough with great enthusiasm. I expressed my medium-term bearish outlook last week, but until the peak of this new 40-week cycle forms, one must “stay with the trend”, and take advantage of the bullish move. But also stay alert to signs of the formation of the peak!

 A bullish bounce

US Dollar Index

The US Dollar continues to present a puzzle with regards to the formation of the expected 20-week cycle trough. I have marked this chart with three white arrows where it is possible that the 20-week cycle trough has already formed. The yellow arrow shows an area in the first week of August where I think it is likely the 20-week cycle trough will actually form. It would not have to fall much below current levels in order to form beneath the relative FLD’s.

 Refusing to drop

That’s it for this week. As the cycles unfold do yourself a service by remembering to consider the many cycles that are all acting simultaneously. At least as many as you can!


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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