Stock markets around the world have been falling for two months now. As a cyclic analyst when a market falls one looks ahead to the next event, which will of course be a trough, and then a bounce back up. And so I have been writing recently of the upcoming 20-week cycle trough. That trough might have occurred yesterday, as the US markets pulled up strongly into the weekend (the market surely does have a sense of humor!) But identifying a trough after one day is a fool’s game, so we will have to wait and see what next week brings.
As the markets fell yet further this week, I was reminded of one of the simplest and yet most important conclusions that can be drawn from Hurst’s Cyclic Principles: when the underlying trend (combination of the net effect of longer cycles) is bearish then peaks will occur early, and troughs will occur late.
In June of this year when I identified the 40-week cycle trough, I wrote that I expected an early peak to the next 40-week cycle (because of the bearish underlying trend), which has manifested: the September peak occurred about 100 days into the average length of 273 days for a 40-week cycle. That is only a little over a third of the way into the cycle, or about 37%. I don’t expect that peak to be exceeded in the current 40-week cycle.
The second part of the phrase is coming into play now: troughs will occur late, and as we wait for the 20-week trough to form it is best to be patient and remind ourselves to expect the trough late. And so this week I will take a step back and look at the unfolding shape of the longer cycles.
The current 40-week cycle is taking on a bearish shape. I expected it to be more bearish (or less bullish) than the previous 40-week cycle, and in this chart you can see that initially that looked as if it would not be the case because of the higher peak in September. But the early peak does qualify this as a bearish shape, and portends an extended move down into early next year, where the S&P 500 should form a trough at a level lower than June’s trough of 1262.
The Nasdaq has fallen harder recently than the S&P 500, and the emerging M-shape of the current 18-month cycle is clearer. Here too the 40-week cycle, despite forming a higher peak in September is looking suitably bearish to complete the 18-month cycle’s M-shape.
The long term picture in the Euro shows the emerging shape of the new 18-month cycle. It is bullish so far, but not as bullish as the cycle that developed out of the June 2010 trough, although that trough might of course have been of greater magnitude, and so we cannot hold that against the current cycle. Nevertheless there is a bearish undertone to the unfolding cycle shape.
This even longer term chart of Gold reveals just how weak the recent 40-week cycle was, the weakest 40-week cycle in over four years. I am still undecided as to whether the peak in September 2011 was of 18-month magnitude or of 54-month magnitude, as discussed several times previously. The analysis presented in this chart chooses the former option, which should see the next 40-week cycle carry Gold to higher prices. Whichever analysis turns out to be correct, the current 40-week cycle should be more bullish (or less bearish) in shape than the previous one.
30 Year US Bonds
The current 20-week cycle shape in Bonds is surprisingly bullish as they approach the level of the July 2012 peak. It implies that the underlying trend active in Bonds at the moment is very bullish … which increases my bearishness towards stocks because the two are mostly highly inversely correlated.
Crude Oil is exhibiting the cycle shape that I was expecting to see in the US markets. The current 40-week cycle is decidedly more bearish than the previous one.
I find it very useful to keep an eye on many diverse markets, and the picture in Crude Oil demonstrates why: when some markets are providing mixed messages, (such as the US markets) I choose the answer that matches most closely with the markets that are providing more consistent answers (such as Crude Oil).
US Dollar Index
Finally the current move out of the September 2012 trough in the US Dollar is looking very bullish, with late peaks and early troughs. As I have been discussing over the past few weeks I am undecided about whether the September trough was merely of 20 week magnitude, or whether it might be an early 54-month trough, which we were expecting to occur early next year. Last week I presented the former option, and so here is the alternate, more bullish possibility:
It is still a bit premature to commit whole-heartedly to this analysis, but until signs of weakness begin to show I’m happy to take a bullish ride – that is becoming increasingly rare nowadays!
Have a good week, and I wish you profitable trading.