ST Outlook – 4 August 2012


One of the most common misconceptions that we cling to when trying to understand financial markets is that news events cause the price movements of those financial markets. As a cyclic analyst I attribute price movements to the “cycles” (what those cycles actually are is open to debate, but the fact that they exist can be convincingly and constantly demonstrated).

And yet news events do of course affect price movements, as we witnessed this week in many markets. What is interesting is how those news events affect markets. I am an absolute purist when it comes to this topic, and so I should warn you that my opinion is an extreme one! (In fact I have learnt to detect the furtive look that spreads over friends’ faces when they are trying not to introduce their “news events” opinions into the conversation for fear that it will trigger my “fundamental tirade”).

It is my opinion that news events have absolutely no effect on the overall movement of price. New events in my opinion cause volatility, a sudden lurch downwards, followed by an equally rapid bounce back up again, or vice versa. Hurst called this fundamental interaction, and this week we experienced at least one absolutely textbook example of fundamental interaction. One knows that fundamental interaction has occurred when despite great volatility in the market the cyclic picture remains completely unchanged – and that is certainly the case this week. Rather than simply say “nothing has changed” for each market I’m going to say it once now, and encourage you to remind yourself of what has not changed by looking back to last week’s ST Outlook!

S&P 500

We are expecting the 80-day cycle peak to form in the US markets soon, after which there will be a fall into the 80-day cycle trough which is expected in late August. The projection boxes in this chart show the probable time and price ranges.

Approaching the 80-day cycle peak

You will also see on this chart the triad lines – the red, green and blue dashed lines. These lines provide very accurate targets, and are an extension of Hurst’s half-span and full-span moving average methods presented in his book Profit Magic of Stock Transacation Timing (we are often asked whether Sentient Trader includes the methods described in that book – the answer is yes, it does). These lines are presently projecting a target for the peak of 1400-1420.

Nasdaq

On this chart of the Nasdaq I have shown the 80-day FLD. The 80-day cycle trough is expected to form below the FLD. As discussed last week it is not impossible that the 80-day cycle trough formed early on Wednesday 25 July 2012, but it seems the less likely option. Interestingly even if that trough does turn out to have formed on that date it does not change the outlook which would still anticipate the formation of a peak soon.

Reaching for the peak

Euro / US Dollar

The Euro this week gets the “Hurst textbook” prize for its exhibition of fundamental interaction. I will continue to watch the rise out of the Tuesday 24 July 2012 trough for evidence of the bigger picture. As discussed previously there are a few options. Here is the most bearish option:

Bouncing out of a 40-day cycle trough

Despite the recent volatility the bounce out the trough looks stronger than the 40-day magnitude trough expected by that analysis, and so I am tending towards this slightly less bearish analysis:

Bouncing out of a 20-week cycle trough

The least bearish option is this one:

Bouncing out of an 18-month cycle trough

Although I think this is the less likely option, I am keeping a keen eye on it. It is my experience that often the analysis that least fits the fundamental picture is the one that turns out to be correct. I’m a contrarian by nature (I know … it hardly needs mentioning), and this analysis presents a very contrary picture: it is hard to imagine how the news surrounding the Euro can get any worse, which is the perfect time for the Euro to recover.

Gold

Well, what can I say? Gold disappointed this week. You will know that I am bearish gold in the medium to long term, but I have been watching expectantly for the formation of a 40-week cycle peak. It is possible that peak has already formed, but as a South African I cannot help holding out some hope for gold. Time is running out however and unless gold moves upwards soon, I will have to accept one of the recent disappointing peaks and we will start loooking for downside targets.

Time is running out

Note how the 40-day and 20-week FLD’s are moving together at the moment. How price behaves when it comes into contact with those FLD’s will be very revealing.

30 Year US Bonds

The bigger picture

Rather than simply repeat myself I thought we should take a step back to look at the bigger picture for bonds. The 18-month cycle is forming or has formed a peak, leaving in place a very bullish-shaped cycle. Bonds will of course fall from this peak, but the underlying trend has a lot of bull in it!

Crude Oil

Oil continues to exhibit good cyclic behaviour. The 40-day cycle trough most probably formed on Thursday 2 August 2012. The next 40-day cycle should carry oil to a higher peak because the underlying trend of the current 80-day cycle is bullish, but of course in the longer term I am still expecting the current 40-week cycle to be bearish in shape.

The 40-day cycle trough forms

US Dollar Index

Forming the 20-week cycle trough

The US Dollar is travelling down the 20-week FLD and should form the expected 20-week cycle trough soon. After a bounce from that trough I will be resuming my bearish contemplations on the dollar.

On a final note I would like to mention something else about Hurst’s concept of fundamental interaction. Hurst famously said that 75% of financial price movement is fundamental, but this should not be confused with the fundamental interaction that I discussed earlier, despite the use of the same word “fundamental”.

The use of the word in the former context refers to the fundamental approach to analyzing financial markets (as opposed to the technical approach) which considers the fundamentals of the market, such as the general economic environment, the “health” of the economy or a particular company and so forth. It is a very slow-moving basis for all price action.

The use of the word in the latter context refers to the short-timeframe interaction of news events, which also of course fall into the fundamental (as opposed to technical) category, which is why the same word is used to describe both.

The difference has to do with the timeframe of the fundamental event. The 75% fundamental influence on price movements changes so slowly that as traders making decisions for periods shorter than several years, the only impact it has is a contribution towards a long term underlying trend. A long term bullishness or bearishness. Fundamental interaction on the other hand is something that lasts only a few days, and generally leaves you right where you started.

Have a good week everyone!


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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