ST Outlook – 7 July 2012


In a conversation with an experienced Hurst analyst (and long-term Sentient Trader user) this week he mentioned that he was feeling bullish “following the current pullback”. I agreed, but later found myself questioning the extent of my bullishness, and realized that I’d missed the opportunity to engage in a “Hurst debate” (one of my favorite debating topics) because in our discussion we had not actually clarified the time-frame of our respective bullishness which I suspect might differ. I will be bullish in the short-term as the market bounces out of the current “pullback”, but I remain medium-term bearish (over the next 6 to 9 months).

As my 3 & 1/2 year old son and I pulled out of a hospital carpark at eleven last night he asked me what I had learned today, and I answered rather cryptically that I had learned the importance of perspective (but that is a really long story which I will tell after this week’s market comments for those of you who have the time!)

And so, bearing in mind the importance of the perspective of the timeframe that I am commenting on, and the timeframe that you are trading (which might be very different), here are my thoughts about what is happening in the markets at the moment.

S&P 500

The US markets are falling into the 40-day cycle trough, forming a bullish cycle shape with a peak 31 days into the current cycle. However there are two measures which determine the bullish or bearish shape of a cycle:

  • The position of the peak in the cycle (which here indicates a bullish cycle)
  • And the relative levels of the troughs which mark the beginning and end of the cycle (not known yet).

Of course we have yet to see the level of the final trough, and as discussed previously I am medium-term bearish the US markets. And so it wouldn’t surprise me to see a deep trough forming.

A bullish 40-day cycle ... so far

 

This is my preferred analysis. There is still the possibility that the 40-week cycle trough has not formed yet, but in many ways that is a purely academic discussion at the moment, because regardless of the position of the 40-week cycle trough, the market is expected to fall in the short term (into the 40-day cycle trough). The correct position for the 40-week cycle will only become important as we consider trading out of the 40-day cycle trough. As soon as that trough forms I will be watching the short term cycle shapes unfold.

Nasdaq

The situation in the Nasdaq currently seems in sync with the S&P 500, and so there is little to add:

Falling to the 40-day cycle trough

 

Euro/US Dollar

The Euro provided the most interesting price movement this week in my opinion. Following last Friday’s strong move up, the cycles all turned bearish on an intraday basis, starting with the cruelest of all bear shapes – A very strong move up which creates an early peak, and leaves a sense of false optimism in its wake. As long as one concentrates on the cycle shapes I believe one can avoid the false optimism trap. As Monday’s price action developed I calculated the simple “bullish” measure of relative peak position for the 5-day cycle and realized that with a shape of  18% bullishness the cycles had unmistakably turned and prepared to trade short, despite the sudden bullish move on Friday. (Personally I enjoy Mondays because they are days of calm observation for me, preparing for the week’s trading. The markets are trading of course on a Monday, but I am not because one has to wait for the cycles to reveal themselves after the weekend. Any trade on a cycle shorter than 10 days on a Monday is a risky proposition).

By close of trading on Friday the low of 1 June 2012 had been taken out (and I was pleased to have focussed on the cycle shape instead of the short-lived optimism of the previous week). This drop below the 1 June 2012 low raises an interesting analytical question: should the 20-week cycle trough still be positioned on 1 June 2012, or should it be moved to the yet-to-be-formed trough?

I favor the first option, shown here:

A very bearish picture

This picture is line with my bearish long-term opinion, because of the bearish shape of the 40-day cycle now forming its trough. Note how price has not managed to cross the 80-day FLD which provided resistance early this week (and a great shorting opportunity). The other possibility is that the 20-week cycle trough (or 40-week cycle trough depending upon the longer term analysis as discussed previously) is only forming now:

Less bearish in the medium term

This would imply more bullish price action for the Euro when bouncing out of the upcoming trough, although of course the longer term picture remains bearish.

Gold

Gold is making much ado about nothing at the moment and going nowhere in particular. I favor the placement of the 40-week cycle peak on 6 June 2012 as discussed previously.

Forming an 18-month trough?

In this chart the 18-month cycle FLD is shown, with a prominent peak in July this year. This implies that the current 18-month cycle is likely to influence price to form a trough at that time (in July). This is an indication only, not an absolute certainty, but it does prepare the stage for a potential that is more bullish for gold in the medium term (over the next 6-9 months). That potential is that the 40-week cycle peak of 6 June 2012 will turn out to be a “straddled” peak which would lead to a roughly symmetrical price formation on each side of that peak. I will be watching gold closely for signs that this scenario is manifesting.

30 Year US Bonds

Below the 80-day FLD

Last week the US Dollar and 30 year bonds were in a similar situation, but this week the two have diverged subtly and are providing contrasting evidence. Bonds broke below the 80-day FLD and the peak of 4 June 2012 still looks viable as the 18-month cycle peak, but if the US Dollar wins the day then the analysis will probably shift to match more closely that of the alternative analysis for the US Dollar (see below).

Crude Oil

Oil looks as if it is completing its first 10-day cycle following the 40-week cycle trough which formed last week on 28 June 2012. The 80-day FLD looms close.

Completing the first 10-day cycle

US Dollar Index

As mentioned the US Dollar and US bonds have diverged in a subtle but important way this week. The main difference lies in the fact that whereas the bonds broke through their 80-day FLD the US Dollar found support on the 80-day FLD and rode up it to nearly match the peak of 1 June 2012. I still expect price to fall to the 20-week cycle trough expected by the end of July or early August, but it is possible that trough has formed early (on 19 June 2012, above the 20-week FLD which is not ideal), and we are already into the next 20-week cycle. Of course this doesn’t change the bearish picture in the longer term.

 Still expecting a fall into the 20-week cycle trough

That’s it for the markets this week. If you have another few minutes, I will share the story of how my three-year old taught me about the importance of perspective (the two greatest teachers are the markets and one’s children, not necessarily in that order):

Last night my son managed to inhale a camomile flower, apparently while conducting a scientific experiment into the source of a flower’s aroma (he removed the petals and sniffed deeply, thus lodging the flower in his sinuses). Four hours and three hospitals later I loaded him into our car and asked (with a tone that might best be described as patonizing) what he had learnt, hoping that my repeated remonstrations about pushing things into noses might have made some impact.

He thought for a moment and then said “I learnt that my nose is REALLY STRONG. Did you see what it did to that flower? It BROKE it into pieces.”

While I was struggling to come up with an appropriate response my son asked me (perfectly imitating my tone) what I had learnt.

It was then that I realized how absolutely everything we do is filtered by our own personal perspective. I believe that successful trading depends as much on understanding that perspective as it does on the analysis that we base our decisions on.


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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