ST Outlook – 7 April 2012


It often seems to me that the financial markets have a wry sense of humor. That sense of humor reveals itself at times that we humans are taking a break from the arduous business of trading the markets, such as is happening over this long Easter weekend. We have been discussing the identification of a 40-week cycle peak in the US markets over the past few weeks, and  the very day before the long weekend the market provided a tantalizing confirmation of that peak. But is it conclusive? And the bond market played its own Easter trick by waiting until the stock markets were closed before making its biggest move of the week.

S&P 500

On Thursday 5 April 2012 the median price of the S&P 500 crossed below the 20-week cycle VTL, as we suggested might happen in last week’s ST Outlook.

The 20-week VTL crossed by price

The VTL crossing occurred on the way down to the 40-day cycle trough expected next week. The markets were closed on Friday (although the futures markets were open briefly, they traded with such low volume as to make the price record unreliable). Is this conclusive evidence that we have seen the peak of the current 40-week cycle? I would describe this as convincing, but not conclusive.

We speak about VTL & FLD “evidence” as if the two cyclic tools were equal. Of course they are not, and generally VTL’s provide more timeous, but less reliable evidence than the FLD, because VTL’s are more directly a result of the phasing analysis that has been performed. If there is a change in the current phasing analysis then the VTL that we are watching with such close attention could very well disappear off the chart altogether. FLD’s of course never disappear, the most they ever do when an analysis changes is shift position.

Nevertheless the current phasing looks pretty good to me, and so I anticipate that this VTL crossing will prove to be reliable. Next week we expect the S&P 500 to form the 40-day cycle trough, and the 80-day FLD might well provide some temporary support, but that will only be a short-lived pause on the way down to the 40-week cycle trough expected in the middle of the year.

Downside potential

Euro/US Dollar

I mentioned last week that the Euro versus the US Dollar was climbing towards the 80-day cycle peak. On Monday the Euro struggled upwards briefly, but didn’t quite surpass the high of Tuesday 27 March 2012, then fell abruptly through several FLD and VTL levels.

Forming a 20-day cycle trough

By crossing the 80-day cycle FLD the 80-day cycle peak is confirmed, and dropping beneath the 80-day cycle VTL confirms that we have seen the peak of the current 20-week cycle, which can now be pinned to 24 February 2012. Price is in the process of forming a 20-day cycle trough, which possibly occurred on Thursday 5 April 2012. This trough will lead to a bounce of sorts, but we don’t expect price to exceed the 24 February peak, or even the 27 March 2012 peak until after the formation of the 20-week cycle trough which is expected in early June this year.

The current 80-day cycle, which has been playing out since the trough on 15 March 2012 is what I call the “bearish sub-cycle”, because it is the second sub-cycle of the current 20-week cycle, and therefore has the 20-week cycle pressing down on it. The developing shape of the cycle is as expected: bearish, with an early peak and strong downside movement.

Gold

Gold gets the “disappointment of the week” prize. I mentioned last week that the current 80-day cycle was beginning to look a little bearish, and it is now looking even more bearish:

Gold fails to form a good 40-day cycle peak

Of course it is still a few days before the 40-day cycle peak is actually expected (cycles are generally longer in gold), but the above chart shows a fairly bearish picture with the price slipping below the projection box. It is possible that gold will rally this week and form a better, more clearly defined 40-day cycle peak (as has happened this past week in bonds), but I’ve seen this sneaky “slipping past the box” behaviour before, and I’m not feeling very bullish about it.

30 Year US Bonds

The bond market performed a nervous jig around the lows of last week, but then (with the stock market closed on Friday), surged up towards the expected 80-day cycle peak.

Approaching an 80-day cycle peak

The fact that bonds pushed up so strongly on Friday is bearish for stocks, and adds confidence to the forecast discussed above (for falling stock prices). It was also a fairly nasty trick for the markets to play over the Easter weekend! If we didn’t have the benefit of watching the cycles it might have caught us out.

Crude Oil

I pronounced the 40-week cycle peak confirmed in Crude Oil last week because of the crossing of the 20-week VTL. Price bounced back up to that VTL as it so often does, and then subsided again towards the 80-day cycle trough which is expected soon, and which might have occurred on Wednesday 4 April 2012, where price and time projections were both fulfilled.

Forming an 80-day cycle trough

If the formation of an 80-day cycle trough sounds like good news for those who like oil, it isn’t really. The next 80-day cycle is expected to be particularly bearish as it carries price into the 40-week cycle trough expected in June this year.

Happy Easter everyone, even if it is a generally bearish one!


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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