ST Outlook – 28 April 2012

I mentioned last week that when the markets exhibit clear cyclic behaviour one should expect surprises, usually in terms of the amplitude and speed of a price move. This week we were surprised by the amplitude of a move, and even more surprised by the fact that it was an upwards move.

Although this week’s strong upwards push in the US stock markets was a surprise it does not invalidate our analysis. But it does offer some interesting analytical options for us to discuss.
S&P 500
I continue to favor the placement of the 40-day cycle trough on 10 April 2012, but the strong bounce out of the trough formed this Monday, 23 April 2012 raises some questions. I believe that there are two likely explanations:
My preferred option is that the 40-day cycle trough is correctly placed on 10 April 2012, and that the trough on 23 April 2012 was an early trough of the 20-day cycle. However, as you might point out, that means that this second 20-day cycle is already looking as if though it is developing a bullish shape which should not be the case.
There are two characteristics of a cycle which define its shape as either bullish or bearish:

  • The relative price levels of the peaks and troughs,
  • And also the relative times at which the peaks and troughs occur.

An early peak is a bearish sign, even if it is at a relatively high level. Of course a peak has not yet formed, but I must point out that if a peak forms soon the developing 20-day cycle (according to this analysis) ¬†could still resolve into a bearish cycle despite the high level of price obtained. If this is the case we might look back on this week’s strong move as a brief period of “fundamental interaction”.
Fundamental interaction (as defined by Hurst) usually lasts for only a few days, up to at most a couple of weeks. The move up or down is very quickly retraced, and I remain wary of this possibility, given the bearish state of this analysis. Note in this chart showing the analysis, the interesting interplay between price and the 20-week FLD (providing support) and the 80-day FLD (providing resistance). These FLD & price interactions are usually brief, but when I see them I am encouraged that the analysis is a good one.
Still potentially bearish
The second explanation for this week’s strong move is that the 40-day cycle trough should not be placed on 10 April 2012 (with a close to nominal length of 35 days), but 13 days later on the slightly higher price trough of 23 April 2012. This implies that the 40-day cycle since the 20-week cycle trough on 6 March 2012 has a length of 48 days, which is unlikely but not impossible. This analysis fits a little more comfortably with the upward move this week (without having to mention tricky things like fundamental interaction).
A late 40-day cycle trough?
Note the outlined blue projection box, which is a “refined FLD projection” created by Hurst’s half-span moving average (called the triad in Sentient Trader because there are in fact three lines that generate the projections). This refined projection is accurately fulfilled by the 23 April 2012 trough.
If the move up of this week persists much longer (into the red market turning point visible at the top of the chart) then this analysis will probably become the most likely option. As a matter of interest this analysis implies that the peak of the current 20-week cycle has not yet been formed and it is a more bullish analysis in the near term, but does not change the bearish outlook in the medium term, as we still expect the market to drop to the 40-week cycle trough in June/July this year.
There is a third option which is worth mentioning, although I don’t present a ¬†chart for it because it involves many unsatisfactory trough placements. This option positions the 80-day cycle trough as an early trough on 23 April 2012, making the first 80-day cycle of the current 20-week cycle a short 48 days. Unlikely, but not impossible.

Euro/US Dollar
The Euro/US Dollar forex pair produced no surprises this week, rising out of the 40-day cycle trough of 16 April 2012, as identified last week. There is some FLD interplay here which is also worthy of comment: note the textbook drop below the 40-day FLD to form the 40-day cycle trough, then the cross up above that FLD to confirm the trough. Also note the way in which price has been clinging to the 20-week FLD, crossing back and forth over the FLD. This kind of FLD behaviour was mentioned by Hurst, and will probably resolve to the downside, creating a multiple-cross situation.
Rising out of the 40-day cycle trough
Seeing as I’m in the mood for considering alternate analyses today, I present this possible alternate analysis for the Euro/US Dollar which claims the 16 April 2012 trough as a trough of the 80-day cycle:
An unlikely alternate
This has the most recent 80-day cycle running at 94 days, which is very unlikely, but it is within the realms of possibility. The only reason I am still keeping an eye on this analysis is because it might avoid the dilemma of the 20-week cycle being left-translated, in other words having a peak in the first 80-day sub-cycle, as pointed out a few weeks ago.
This left-translated 20-week cycle is a slightly disconcerting dilemma. It doesn’t disqualify the preferred analysis presented above, but it probably does raise a few eyebrows in the Hurst community. A 94 day long 80-day cycle (which should have an average 68 day length) might raise a few more eyebrows!

Last week I suggested that the 12 April 2012 peak in Gold might be the better placement for the 40-day cycle peak. This week’s bullish move in gold has Sentient Trader enthusiastically agreeing with that:
A later 40-day cycle peak
The 40-day VTL has shifted because of this new peak position, and price crossed that VTL this week, and also crossed the more reliable 80-day FLD, informing us (again) that we have seen the trough of the current 80-day cycle, and are looking at a generally upward move to the 80-day cycle peak expected about the end of May this year. The target box in the upper 1700’s looks optimistic to me, but we should be seeing higher gold prices over the next month or so.

30-Year US Bonds
Bonds continue to provide for a challenging analysis. Sentient Trader is refusing to pin the 80-day cycle peak onto the chart, because it is struggling to find a suitable peak, reminiscent of the difficulty we had in finding troughs within the upward march of the US stock market earlier this year.
Looking for a peak
Note how price has now passed that red-filled peak turning point (in terms of time), but at 87 days in length the 80-day cycle is not yet impossibly long.
However I continue to favor positioning the 80-day cycle peak on the subtle peak of 10 April 2012, making for a more suitable 70 day cycle length. If that peak does turn out to have been the 80-day cycle peak then the developing shape of the new 80-day cycle is proving to be extremely bullish, which is of course extremely bearish for stocks.
Bonds and stocks are generally very closely inversely correlated, and we are seeing a divergence developing between them at the moment. The rubber band that holds these prices in their inverse correlation is going to pull them back together soon, and one of these markets should yield to that pressure. If it is stocks then that will be a strongly bearish move. Of course it could be bonds that give way if they turn down very soon, and form the 80-day cycle peak at current levels.

Crude Oil
Crude Oil gets the Hurst Gold Star for perfect cyclic behaviour yet again.

A perfect Hurst picture

Notice how price is very close to crossing both the 40-day VTL and the 80-day FLD, which would confirm the placing of the 80-day cycle trough on 10 April 2012. Price has also been “riding up” the 20-week FLD, which would be better if the FLD was beneath price, but we cannot expect absolute perfection!

US Dollar Index

The US Dollar has also been behaving very well (in cyclic terms, no doubt most Americans would not describe the dollar’s behaviour in favorable terms).

A 20-day cycle trough?

Price is in the process of forming the 20-day cycle trough, which might have occurred already. 24 days is a little long for the 20-day cycle, but it is the average length that cycle has been running at recently.

Price will possibly find resistance on the 20-week FLD, bounce up a little, then cross below the FLD towards the 80-day cycle trough expected towards the end of May.

As always, good trading, and keep an eye on those cycles!

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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