Fibonacci Time – 1 December 2012

As this week the market continued to bounce out of the 20-week cycle trough which formed on 16 November 2012 I started asking what we can look forward to over the next few months.

This is what I expect: The new 20-week cycle which is pushing markets up at the moment will form a peak at some point and the markets will then turn down into the 18-month cycle trough which is expected early next year. The big question is “at what point will the 20-week cycle peak?”

To answer that question I like to consider the cycle shapes. Cycles form “M” shapes in the markets, and clues to the shape of the next 20-week cycle are provided by the previous one. As a useful starting point I consider a symmetrical completion of the M, as shown here:

But that assumes that the forces of the longer cycles are neutral, resulting in a balanced “M” shape. In fact they are not neutral, but are bearish as the 40-week and 18-month cycles press down into their troughs expected early next year. And so the expected shape of the current 20-week cycle is more like this:

Having roughed out an approximate cycle shape I find it useful to explore the numbers, and I always start with Fibonacci. Fibonacci ratios are used extensively when considering price projections and retracements in financial markets, but I extend my consideration of Fibonacci ratios into time, and use them in understanding the shape of a cycle. Most people consider only Fibonacci numbers (3,5,8,13 …) when it comes to time, but I find ratios very useful. Cycles in financial markets very often exhibit Fibonacci ratios in the placement of their peaks and troughs, not only in terms of price, but also in time.

For instance, the previous 20-week cycle (in the S&P 500) lasted 165 days (measured from trough to trough). The peak of 14 September 2012 occurred 102 days into the cycle: a perfect 61.8% into the cycle! (61.8% is a Fibonacci ratio in case you weren’t aware of that).

The move from the initial trough to the peak was 212.5 points in the S&P 500 (ES futures). Then the fall from the peak to the final trough on 16 November 2012 was 134.25 points, or 63% of the prior rise. The 61.8% level was at 1343, a mere 3 points above the low of the day.

Fibonacci ratios are everywhere in the markets, and it is fascinating to find them, but actually trading on the basis of them can be frustrating. I don’t use Fibonacci ratios to trade, but I do use them to inform my analysis, and this week we can use Fibonacci ratios to get an idea of when the current 20-week cycle might peak.

If the current 20-week cycle traces out a balanced, symmetrical M-shape as shown in the first chart above, then we could expect the peak to form at the 38.2% position. The problem is: 38.2% of what? We don’t know how long the current 20-week cycle will be (because of the Principle of Variation). And so I use the average length of 136 days. That would give us a peak on 7 January 2013.

However I expect the peak to occur earlier than a symmetrical position, and so I consider the smaller Fibonacci ratio of 23.6% as a possibility: that would have a peak occurring on 18 December 2012.

Of course we don’t know how long this 20-week cycle will be until it is over, but this small exploration of the mathematics of cycle shapes reveals why I am expecting a peak towards the end of this year, or early next year.

We can also use Fibonacci ratios to suggest levels at which the peak might form. A 61.8% retracement of the recent downward leg would give a level of 1423, only a few points above this week’s high. Another common Fibonacci ratio is 78.6%, which would result in a peak level of 1445.

S&P 500

The S&P 500 moved through the formation of a 10-day cycle trough this week, with hardly a tremor.

Nasdaq

The Nasdaq also steamed upwards from its 20-week cycle trough.

Euro/US Dollar

The move up in the Euro was sustained this week, making the 13 November 2012 trough seem likely to be a 20-week cycle trough as suggested last week.

Gold

Gold fell hard this week, providing another reminder that we should expect cycles to run long in Gold. The peak on 23 November 2012 was most probably a late peak of the 40-day cycle as suggested last week.

30 Year US Bonds

Just as the Euro might have turned into a new 20-week cycle, so too might have Bonds (although it would have been a 20-week peak, not a trough). But the alternative, that there are still a few weeks to go to the 20-week peak is not yet out of the question. Here is the alternate view:

Crude Oil

Crude Oil stumbled this week a little further than the stock markets as it formed a 20-day cycle trough. Anyone else take a C-category trade on Thursday?

US Dollar Index

The US Dollar is struggling to form an 80-day cycle trough. If it doesn’t do so soon, and produce a good bounce out of it, we will have to reconsider the placement of the 54-month cycle trough in September, and we’ll be looking at a deeper move down into that 54-month cycle trough early next year.

If you would like to apply Hurst Cycles analysis to your own trading and you missed the October FLD Trading Strategy course then make sure that you are receiving emails from us because due to popular demand we are starting a new course in December. There is more information about the FLD Trading Strategy here.

Have a good week, and profitable trading!