ST Outlook – 25 August 2012


On Tuesday (21 August 2012) the US markets made new highs intraday, (relative to the peaks formed earlier this year), but by the end of the day prices had started a strong move downwards which continued until Friday morning (24 August). The result was that a new closing high was not achieved. I mentioned last week that Elliott Wave practitioners were watching those levels very closely because of the Elliott Wave rule that wave two cannot exceed the start of wave one, and there are some Elliott Wave practitioners who claim that the rule does not apply to intraday moves, but only to closing prices. For those analysts the wave count that claims this week’s peak as the culmination of a bearish wave two is still valid, despite a 99 % retracement of wave one.

As I have mentioned before I think that Elliott Wave analysis works very well in conjunction with Hurst Cycle analysis, but my primary analysis method is of course Hurst. We have been expecting a peak to form in the markets, and this week a peak did indeed form. The question to answer now is whether that is the peak, or could there be another peak still coming? Peaks are more complex in formation than troughs are (as mentioned last week), and so we need to consider the evidence very carefully before making a final declaration.

S&P 500

What evidence do we have that price has formed a peak? We look to the cyclic tools, the VTL (Valid Trend Line) and the FLD (Future Line of Demarcation). Here is the picture of VTL and FLD interaction at the shorter end of the scale:

VTL & FLD picture

On Wednesday price crossed below the 20-day VTL, thereby confirming that the peak on Tuesday was of at least 40-day magnitude. VTL’s are not as reliable as FLD’s, and so I prefer to consider VTL information as “probable but not definite”. In order for the FLD’s to confirm that same 40-day minimum magnitude for Tuesday’s peak price will have to cross below the 40-day FLD (the blue line on the chart). As often happens price reached down to that level on Friday morning, and then bounced up. Price might ride above the FLD for a few days, but it is expected to drop below the FLD on its way down to the 80-day cycle trough.

In the meantime price is riding along the 20-day FLD (the purple line on the chart). That FLD might well support price early next week, but towards the end of next week price is expected to drop away to the downside. It is also interesting to look at the longer FLD’s. Here is a chart which shows the 20-week and 40-week FLD’s:

Longer cycle FLD's

I have marked on this chart with double-headed yellow arrows the times recently that the 20-week cycle FLD has pin-pointed to within a day turns in the market. A trough in the FLD informs of a peak in the market, and a peak in the FLD informs of a trough in the market. Because the market is moved by an infinite number of cycles this is not an exact science. But there are times when a particular cycle is very evident and the turns in the FLD match very clearly the turns in the market. This is happening at the moment with the 20-week cycle FLD, which formed a prominent trough on Tuesday, making it a very likely day for a peak of some importance to form. There is another trough in the 20-week FLD in the first week of September, implying the formation of another peak at that time. However I expect that to be a lower peak because of the 40-week FLD. Price bounced off the 40-week FLD on Friday morning, but any support offered by the 40-week FLD falls away sharply next week, and I wouldn’t be surprised to see price tracking down that FLD over the next few weeks.

Nasdaq

The Nasdaq also formed a peak on Tuesday, and instead of simply repeating my comments about the S&P 500 I thought a longer term picture of the median price might be of more interest.

Median price showing a slightly higher peak

I mentioned above that Elliott Wave analysts are highlighting the difference between a higher intraday peak and a lower closing peak. Hurst analysts tend to be more relaxed about the level of peaks and troughs, and often look at the median price as opposed to the extremes of high and low prices. The median price on Tuesday did in fact form a slightly (2 points in the Nasdaq) higher peak than the March peak. As discussed in previous ST Outlooks I have been expecting the peak of the current 40-week cycle to be lower than the previous 40-week cycle. But this ever-so-slightly higher peak will do just as well.

Euro/US Dollar

Last week I pointed out that price had been travelling along the 20-day FLD, and that I expected it to resolve to the upside. That is exactly what happened this week, and now we are looking forward to the formation of a 40-day cycle trough within the next week or so.

40-day cycle trough next

Note how the 20-day and 40-day FLD’s are moving together at the moment and until the end of August. They are forming an FLD congestion zone which is likely to provide some support for price.

Gold

Last week I presented the case for a move up in gold to complete the W-shape of the second 20-week cycle following last September’s 18-month cycle peak. The precious metal obliged this week and moved up strongly:

Moving up to the 40-week cycle peak

The bad news is that the move up this week completes the W-shape, and brings gold above the 40-week FLD as can be seen in this chart:

Ready for a peak

Which means of course that the time is ripe for a peak for occur! Cycles often run long in gold, and you can see that the current 40-week cycle is already 50 weeks old. The current 20-week cycle is already 25 weeks long, a few days longer than the previous 20-week cycle (see the top chart).

I do expect some follow through to the upside (because of the projection created by crossing the 40-week FLD), and prices should reach the $1700 level, perhaps even as high as $1750. But we need to prepare for gold to turn down again soon. It is important to remember that the outloook for gold in the medium term is bearish, and that because the analysis for gold is inverted, peaks tend to be quick and clean, like troughs in the stock market.

30 Year US Bonds 

Rising to the 40-day cycle peak

Last week I expected bonds to bounce up towards the 40-day cycle peak, and that is exactly what they did. The 40-day peak should form within the next two weeks, after which of course the fall from the 18-month peak on 25 July 2012 will resume.

Crude Oil

Crude Oil continues to show perfect Hurst cycles. It didn’t quite reach the $100 level, but might yet.

Heading for the 80-day cycle trough

The peak on Thursday is probably the peak of the current 80-day cycle, and we should expect the 80-day cycle trough next, although given the bullishness of the past two months, that trough might not be a very profound one.

US Dollar Index

A 20-day trough

The US Dollar provides an interesting point to make in conclusion today. Friday’s bounce up in the US stock market was surprisingly strong, and not in line with other markets around the world (both the FTSE and the DAX had smaller bounces for instance). One reason for that might be that the US Dollar was bouncing out of a 20-day cycle trough, a bullish pause in its journey downwards.

Finally, was Tuesday’s (21 August) peak the peak? Considering the weight of the evidence presented across all the markets, I would say yes, it was. Of course time will tell, but I would suggest keeping your eye on the cycles, I think we could be in for some strong bearish action.

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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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