ST Outlook – S&P 500 (5 October 2011)

In last week’s ST Outlook for the S&P 500 I discussed the probability that the peak on 20 September 2011 would be the peak of the current 40-day (and 80-day) cycle, a likelihood that was confirmed as price moved down, “jumping” into the FLD gap.

Price drops out of the Pause Zone

And so now we must turn our attention to identifying the forthcoming 40-day cycle (and synchronous 80-day cycle) trough. Here is the analysis since the 20-week cycle trough on 9 August 2011.

Analysis since 9 August 2011

The bar counts on the chart show that 57 days have passed of the current nominal 80-day cycle, which means that we expect another 9-11 days to elapse before the 80-day cycle trough forms (current average length is 66 days, and average nominal length is 68 days, hence 9-11 days remain). And 23 days have passed since the previous 40-day cycle trough, placed on 12 September 2011, implying that we expect about another 11 days to elapse before the 40-day cycle trough, which is of course synchronous with the aforementioned 80-day cycle trough, and so they are effectively one and the same trough.

Notice the clearly formed trough on 4 October 2011. This is most probably a trough of the 20-day cycle, but it is possible that it is an early manifestation of the 40-day (and 80-day) trough that we are expecting. This is considered a possibility by Sentient Trader user Silent One (posted on our forum). Silent One’s market calls are famously accurate, and so it is a possibility well worth considering:

  • If 4 October 2011 is the trough, then that would make the 80-day cycle that completed at that trough 56 days in length. This is 18% short of the expected length of 68 days, which is not impossible at all, and so we cannot rule out the possibility.
  • Similarly, if 4 October 2011 is the trough, then that would make the 40-day cycle that completed at that trough 22 days in length. This is 35% short of the expected length of 34 days, which is very unlikely. However, that assumes that our positioning of the most recent 40-day trough on 12 September 2011 is correct. Recent market action has made the identifying of troughs fairly tricky, and that 40-day cycle trough might have occurred on 7 September 2011, which would overrule this objection.
  • In a market with a negative underlying trend one expects troughs to occur lower and later, not earlier, which argues against the 4 October 2011 trough being the expected trough.
  • The two days of price movement since the 4 October 2011 trough have been fairly strong, although given the recent very high volatility in the market, this does not mean that the trough is not of only 20-day cycle magnitude (compare with the bounce out of the 20-day cycle trough on 22 August 2011)

All things considered I still favor the analysis shown above, and am considering the 4 October 2011 trough to be a trough of the 20-day cycle. The truth will of course be revealed by the cyclic tools, the FLD and VTL. The FLD levels are shown on the first chart in this post, and below are the VTL levels.

VTL levels

To some extent this discussion is all fairly academic, because I would not be interested in a long trade (on the 40-day cycle, which is the trading cycle I am considering in these ST Outlooks) because of the very negative underlying trend for the next 40-day cycle:

Current Cyclic ModelThis is the current cyclic model, and so we need to think ahead a little to the next 40-day cycle, which would have a positive boost from the 80-day cycle, and the 20-week cycle would be considered flat, or perhaps negative. That makes for a total underlying trend of -3, which is strongly negative, and not the sort of condition one wants for a long trade.

Finally, here is a reminder of the long-term picture:

The long term picture

I confess to having a bit of a chart fetish, and this chart fits into my “beautiful pictures” category, because of the way in which the cycle shapes are unfolding. A beautiful chart, but nevertheless daunting because of the bearish implications for the market looking forward into early next year. I am certainly not thinking of buying, or trading long until some time next year.

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.

Leave a Comment

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>