ST Outlook – S&P 500 (12 October 2011)

Last week I was favoring another 20-day cycle to elapse before the expected 80-day cycle trough, but as price ripped through the 40-day and 80-day FLD’s on Monday, Sentient Trader user Silent One was vindicated in his early call of the 80-day cycle trough on Tuesday 4 October 2011.

The early 80-day cycle trough on 4 October 2011

But as I have been warning for several weeks, this move up is not of great interest because of the strongly negative underlying trend. It is the next move down that we are interested in catching. The projection boxes above say it all: this move up might have been fast and impressive (dare I say “in a desperate way”?), but the next move down in price is expected to be a good deal more impressive.

What clues will we will have that price has turned down? Here are the FLD levels:

The FLD levels

Notice how price is very close the 20-week FLD (dark green FLD line), which it is not required to cross above, but that would be a well-behaved price action! Crossing above that FLD would confirm that the 20-week cycle trough has occurred. We have been positioning that 20-week cycle trough on 9 August 2011, but as a matter of interest there is an alternative analysis which positions the trough on 4 October 2011:

Alternate analysis

Note that this analysis differs only in the phasing since the 80-day cycle trough on 16 June 2011, and it requires an unlikely degree of stretching of all cycles since then (note the 28.7 week length of the 20-week cycle). We do expect cycles to be stretched during negative underlying trend conditions, but this degree of stretching is most likely too extreme, which is why this analysis is still the less likely one.

In fact it makes little difference which analysis does turn out to be the true one, because the difference is one of only one degree of magnitude: Was the trough on 4 October 2011 a trough of the 80-day cycle or a trough of the 20-week cycle?

One might assume that this would make a great difference in terms of the amount of time that the market will move up from this trough (based on the misconception that price will move up for half a cycle’s wavelength after a trough of that cycle), but in conditions of negative underlying trend, the bounce out of a 20-week cycle trough will not be much more impressive or of much longer duration than the bounce out of an 80-day cycle trough.

And so either way, we need to look ahead to the next move down, and prepare to take short positions. Here are the VTL levels:

The VTL levels

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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