ST Outlook – 26 May 2012


Markets around the world are approaching turning points of 20-week (Euro/US Dollar) or 40-week magnitude. The actual turns are unlikely to be perfectly synchronized because perfect synchronization between markets is a satisfying event that usually only occurs on cyclic turns of at least 18-month magnitude, as we saw last year on 4 October 2011.

Approaching a 20 or 40-week turning point, the market likes to twist and turn in a playful sort of way, taunting us with potential turns that often turn out to be false. True to form the US markets bucked upwards on Monday, but then spent the rest of the week failing dismally to follow through. The 40-week cycle turn is approaching and volatility is likely to increase, so we should be on standby for further “fakes”.

S&P 500

Last week the S&P 500 crossed below the 40-week FLD, and this week it changed its mind and crossed back up above it, then below it, and finally above it again. This kind of crossing to and fro over an FLD is not unusual and it also doesn’t render the significance of the price cross invalid. It simply means that this price cross is going to be a complex one. Price is expected to resolve to the downside, where it should form a trough of the 40-week cycle below the 40-week FLD.

There is a very small chance that price will remain above the 40-week FLD and leave in its wake the trough of Monday 21 May 2012 as the trough of the 40-week cycle, but that is so unlikely that the only truly reasonable question to ask now is where the 40-day cycle trough should be placed. I favor placing that 40-day cycle trough on Monday 21 May 2012:

40-day cycle trough slightly late

That makes the most recent 40-day cycle 41 days long. Price will try to cross above the 40-day FLD shown on the chart above before falling into the 40-week cycle trough, but given the bearish situation at the moment, it might not make it. The alternative is that the most recent 40-day cycle ran short at 29 days:

An early 40-day cycle trough

In this median line chart you can see the 40-week FLD interaction with price. This is the less likely analysis because with a bearish underlying trend we would expect the 40-day cycle to occur late rather than early, but it is useful to keep it in mind. What is the difference between the two analyses? It all boils down to when to expect the approaching 40-week cycle trough:

  • The first, most likely analysis expects the 40-week cycle trough in 20-30 days (give or take a little for variation)
  • The second, less likely analysis expects the 40-week cycle trough in 15-23 days (give or take)

There’s not much in it, but you can see the reason I keep the less likely analysis in mind: it has us prepared for a potential (although unlikely) early trough.

Euro/US Dollar

Last week we discussed the bearish nature of the Euro / US Dollar forex pair, and this week that bear turned ugly, providing a real-world demonstration of one of the most reliable Hurst truths: When underlying trend is bearish, troughs occur late.

20-week cycle trough is overdue

Gold

Gold had a difficult week, stuggling to rise towards the 40-week cycle peak that we have been discussing. Is it possible that Gold will not muster much of a rise at all? Yes it is. With the Euro fresh in our minds, we should bear in mind the corollary to the above Hurst truth: When the underlying trend is bearish, we should expect peaks to be early (and disappointing).

No great expectations

30 Year US Bonds

Bonds spent the week at lower levels, falling from a likely 40-day cycle peak on 17 May 2012. There is more bullishness in bonds yet: the 18-month cycle peak is expected in 2-4 weeks.

Reaching for the peak

Crude Oil

Oil continues its relentless fall into the 40-week cycle trough. It is hard to position the 40-day cycle trough, but that is to be expected given the bearish underlying trend. Nevertheless the 40-week cycle trough is expected in about three weeks.

Falling ...

US Dollar Index

The US Dollar has been climbing with such persistence that I have taken a step back to consider whether the trough on 2 May 2012 might be one degree of magnitude greater, and be a trough of the 20-week cycle as opposed to a trough of the 80-day cycle. The resultant analysis is intriguing:

Rising out of a 20-week cycle trough?

Note the very narrowly defined nests-of-lows (the future trough markers). Such a narrow range for each nest-of-lows occurs when the regularity of the cycles is nearly perfect. That implies a good analysis, but the “straddled” phasing of the 40-week cycle trough on 4 January 2012 is not so good and counts against this analysis.

Here is the analysis that we have been tracking, and which is still valid:

Rising out of an 80-day cycle trough?

The difference between the two analyses can be summarized as:

  • The next major trough expected in July of this year will be of either 80-day or 20-week cycle magnitude.
  • The first analysis expects the formation of a very long cycle trough (18-month or even 4 & 1/2 years) in September – October this year, whereas the second analysis expects the same cycle trough at the end of this year, or early next year.

Nasdaq

Last week’s guest appearance of the Nasdaq proved popular, and so here it is again! Last week I provided a glimpse of my preferred analysis. This week let me present both options that I believe might be playing out. First of all the short-term more bullish analysis which I presented last week:

40-week cycle due now?

The Nasdaq has had a tendency to preempt troughs in the S&P 500, which is one of the reasons that I favor this analysis. Here is the alternate analysis which matches very closely the analysis of the S&P 500:

Further to fall

That’s it for this week. Beware the volatility that accompanies these long cycle troughs!


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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