Deja vu? 4

Cyclic analysts are familiar with the feeling of deja vu as the cycles repeat over and over again in the markets. Of course there is enough variation to keep us on our toes, and because of the multiple cycles which influence financial markets the situation is always a little different. History repeats itself … but not exactly.

Recently I have been tracking an interesting correlation with the market action three years ago. In October 2014 an 18-month cycle trough formed (in my opinion), with the next 80-day cycle trough in mid December 2014. And in October 2011 an 18-month cycle trough formed, with the next 80-day cycle trough in late November 2011. Three years ago we were witnessing the start of a three year bull run as shown in this chart:

The start of a bull run

Are we going to see the same again? I don’t think so. I have been expecting the 9-year cycle peak to form in markets as described in this post, and it is possible that peak formed in the last few days of 2014 in the S&P 500, and earlier in September 2014 in the FTSE (as discussed in this post).

And so, rather than looking forward to another three bullish years, I am expecting the markets to enter into a bearish mode. Are there any clues to be found in comparing the similar cyclic structure of today with three years ago? Let’s take a look.

Here is situation in the S&P 500 today:

The S&P 500 today

The bar counts at the top of the chart are the distance from troughs to peaks, of the 80-day cycle (from mid November 2014 to mid December 2014) and the 20-day cycle that completed earlier this week.

The green percentage figures are my way of measuring the “bullishness” of the market (as discussed previously). This shows that we had a good bullish 80-day cycle (at 76%), but the 20-day cycle that followed was distinctly less bullish at 58%. The next 20-day cycle (which is the current cycle of course) is expected to be less bullish – which implies a bearish cycle shape (less than 50% is a bearish cycle). A bearish cycle shape would result in the 40-day trough (expected towards the end of January) forming below Tuesday’s low of 1984.

Before we compare this with the picture of three years ago, there is another detail I would like to highlight. The 80-day VTL was breached this week, which is a bearish sign. Theoretically when price touches the level of the VTL that qualifies as a cross (which is a subtle difference between the FLD and VTL – and will have to be the subject of a separate post!) That tells us that the peak of the current 20-week cycle has already formed in the market. That is a very important point, and has some very bearish implications, because it means that the 9-year cycle peak has probably also formed, and we need to tighten our seat-belts for the ride down.

However I say that “technically” the VTL was crossed … I have found that sometimes VTL “touches” are premature, and I prefer to wait for a genuine cross below the VTL. But strictly speaking a VTL touch is as good as a cross, and should certainly be kept in mind as a bearish sign.

Now let’s compare this with the similar situation three years ago:

The S&P 500 3 years ago

There are a few interesting comparisons to be made:

  • First of all, the shorter 80-day cycle (52 days as opposed to 62 days). This could be simply the result of the Principle of Variation, but generally we expect earlier troughs when the underlying trend is more bullish, and so this is a first indication that we are in a less bullish state than we were three years ago.
  • Secondly I find the progression of “bullishness” very interesting. I have often noted that at the beginning of a bullish run the bullishness can take a bit of time to build up – rather like a coiled spring. And so the absolute figures are not as important as the progression of the bullishness. Three years ago we had a slightly bullish 53% 80-day cycle followed by an 84% 20-day cycle. That’s what I mean by a progression of bullishness. On the other hand we see the opposite: a more bullish 76% 80-day cycle followed by a much less bullish 58% 20-day cycle. That is not a progression of bullishness, but a move towards “bearishness”.
  • Thirdly note that the 80-day VTL three years ago was not breached (or touched) until much later. By comparison the situation today is distinctly less bullish.
  • Finally note the compression of the cycles three years ago: a 52 day long 80-day cycle, followed by a 14 day 20-day cycle (and 24 day 40-day cycle). That sort of compression occurs at the beginning of a bull move. By comparison the cycles appear to be expanding at the moment, with a 62 day long 80-day cycle, and a 21 day long 20-day cycle.

In summary, it seems to me that this comparison warns us that the markets are turning bearish after years of bullishness.

A few weeks ago I compared the FTSE with the US markets, and discussed the idea that the UK and European markets were turning bearish ahead of the US markets. Here is the same comparison with the situation three years ago in the FTSE. This is the situation today:

The FTSE today

And here is the situation three years ago in the FTSE:

The FTSE 3 years ago

The charts have some differences and similarities, but again the result of the comparison, it seems to me, is the conclusion that we are in a more bearish situation now than we were three years ago. Add to this the expectation that the 9-year cycle is forming a peak and we have a bearish situation, as opposed to bullish expectations.

Potentially a very bearish situation. I have been watching with some concern the endless stream of optimistic media reports about the continued bull market in 2015. I cannot say that I agree with them. I look forward to hearing what you think!

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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4 thoughts on “Deja vu?

    • David Hickson Post author

      Hi Jeffrey. I use two measures for bullishness: the relative position of the peak in terms of time, and the extent of the move up to the peak relative to the move down to the closing trough (measured in price). In my opinion those two aspects of the cycle define its “bullishness”.

  • SpiderGuy

    David, you analysis about us being close to a top seems to be confirmed by my own cyclic model.I am yet to ‘tune’ Sentient trader’s phasing analysis with this model. When i do, i’ll post the results of Sentient trader’s analysis. Suffice to say, it doesn’t look like there’s much upside for the S&p 500 at this point. A plunge into Q2 of 2015 seems to be what is in the cards.

    • SilentOne

      The banks worldwide are entering bear markets. US banks are just breaking down now, the last to go. Some Canadian banks have shown clear cyclic failures and taken out the Oct. lows. Some Canadian banks have been down almost everyday this year. I will post something a bit later today. Spiderguy, in your projection for respective lows I have the blue line as the basic path (ie down into Jan. 2016). However a May low could be an important low as well. It will be interesting to see how the Central Banks handle the coming year.