It might be my film-making background, but I always believe that I can detect a personality in the financial markets. Perhaps better described as a “character” than a personality, the traits that I identify are remarkably consistent in each market. This week we witnessed the cruel cunningness of a remarkably intelligent trickster, as the markets kept us guessing about the magnitude of the trough on 4 June 2012 which we have been discussing over the past few weeks.
It is almost as if the market knows that we are watching those FLD lines, and taunts us with potential, but unconvincing price crosses, until only a tenacious few are still hanging in there, and then suddenly the market says: “only kidding!” and behaves as we were expecting it to all along. I have learnt to hang in there because I’ve seen this behavior so often, but it takes some tenacity and a good deal of patience. The trick, as always, is to keep an eye on the shapes of the cycles as they unfold. This week was interesting because the intraday cycle shapes were consistently bullish, although on a very muted scale, right up until Friday morning at which point the mutes were removed.
Before we take a look at the markets it is worth mentioning that the bounce out of the 4 June trough has a distinctly “corrective” look to it, in Elliott Wave terms. I am of course primarily a Hurst analyst, but the interplay between Elliott Wave and Hurst is a constantly fascinating and very informative area. The fact that the move is corrective does not mean that trough cannot be of 40-week magnitude. A corrective move out of a 40-week cycle trough is quite possible, but of course bearish in implication, and supports the bearish medium term outlook presented last week. A combination of Hurst and Elliott Wave analysis is a very powerful approach to the markets.
The US markets completed the first 20-day cycle following the 4 June 2012 trough this Monday, 25 June 2012. Despite the strong and rapid downward moves recently the 20-day cycle had a bullish shape (enabling us to position on the long side for Friday’s big move up). Two options remain viable: that the 4 June 2012 trough was of 40-week magnitude:
Or it is still possible that the 4 June 2012 trough was of only 80-day magnitude:
The Nasdaq has been dancing an interesting jig around the 80-day FLD for the last two weeks, a dance which appeared to reach a dramatic conclusion with Friday’s strong move up, leaving in place a slightly long 20-day cycle of 24 days. Price looks likely to reach up to the 2685 level before peaking.
The beleaguered Euro has also been interacting with the 80-day FLD, although this interaction has been less playful as price was forced downward by the FLD. On Friday the cycles reasserted themselves and price broke free of the FLD. In the short term there are two possible interpretations. A straddled 20-day cycle trough on 18 June 2012:
Or it is possible that the recent 20-day cycle has extended to a very long 27-days (I had to use a 4-hour chart to demonstrate this, because on an EOD level Sentient Trader refuses to accept such a long 20-day cycle):
We need to stay alert to the first possibility, because it implies that either the 40-day cycle trough has occurred early (on Thursday this week), or that we should expect an imminent downwards move into the 40-day cycle trough. With regard to the long-term picture discussed a few weeks ago, we should soon be able to resolve which analysis is the true one, and where to position the most recent 18-month cycle trough. Of course the long term outlook is bearish regardless of where that 18-month cycle trough is, it is purely a question of degree of “bearishness”.
In a clear contradiction of the widely held and deeply flawed “safe-haven” idea that gold moves contrary to stocks, gold also leapt upwards on Friday. It is possible that the 40-week cycle peak is still to be formed in the gold price, but as shown in this chart the upward projection is not very optimistic:
Of course the 40-week cycle peak should form above the 40-week FLD, which is now a good distance above price. It is not impossible that gold could stretch that far, but given the longer term bearish outlook for gold it is more likely that the disappointing peak on 6 June 2012 (phased as the most recent 40-day cycle peak in the above analysis) will turn out to be the 40-week peak after all, as discussed last week.
There is another possibility that is beginning to emerge – that the peak on 6 June 2012 will turn out to be a straddled 40-week peak, which implies a much more bullish outlook for gold over the next nine months. But this is only a remote possibility that we should keep an eye on as the cycles unfold.
30 Year US Bonds
Bonds fell on Friday, as expected, but they have yet to cross beneath their 80-day FLD:
That FLD lurches upwards next week, and bonds would have to work hard to avoid crossing beneath the FLD.
Crude Oil gets the Hurst “perfect cycle” award this week, after forming a very clearly defined trough on Thursday. We have been anticipating the formation of this 40-week cycle trough for some time now, and when the news headlines about oil’s “surprise” move up on Friday started flashing across my screens I allowed myself a small “cycle analyst know-it-all” chuckle.
US Dollar Index
The US Dollar had a bad day on Friday, but we have been expecting this. In a very similar position to US Bonds, the Dollar is poised above the 80-day FLD, and looks set to continue its fall into the 20-week cycle trough expected in July.
I opened this week’s post with a mention of the character of the market, and I’d like to mention again in closing how that character has manifested recently. Looking back over all of today’s charts I am struck again by the way in which the market seems to behave contrary to expectation (but without doing anything that actually invalidates the cyclic analysis), to the point where most people would throw in the towel and admit they were wrong. At exactly that point the market finally turns in their favor. I hope these ST Outlooks are helping you to be amongst the tenacious few.