New Year Bounce – 5 January 2013 8


The two weeks encompassing Christmas and New Year are difficult times to trade. It is one of the fundamental concepts of Hurst’s Cyclic Theory that cycles influence the prices of financial markets perpetually: 24 hours a day, 7 days a week, regardless of whether we are trading those markets, or are taking time off. Most traders don’t realize this, and so the trading that surrounds holidays is often very volatile as the markets try to find their correct level. Traders are mostly thinking back to the time before the holiday, but those levels don’t apply anymore because time has passed and the cycles have moved. The result is often some very volatile swings in price.

The year 2013 has started off with a tremendous surge upwards in the stock markets (in fact the surge happened almost entirely on the last day of 2012, and as a gap upwards on the first day of 2013, which was not a trading day). Some are seeing this as a portent for a great (bullish) year ahead, but I am not one of them. The market has bounced out of a 40-day cycle trough. There has been some additional volatility because of the holidays, but it is nevertheless a 40-day cycle bounce. Gaps come in various flavors, and soon we will see whether this proves to be a breakout gap or an exhaustion gap.

In my last post before Christmas I introduced an analysis that has the November trough phased as a trough of 18-month (at least) magnitude. The bounce into this new year raises the chances on this analysis, but it does not eliminate the preferred analysis that has that trough phased as a trough of the 20-week cycle, with a fall into the 54-month cycle trough imminent. This latter scenario is the more dangerous one and so we need to stay alert to the possibility of a hard fall into the 54-month cycle trough, while profiting from the current bull move.

In case the mention of alternate analyses leaves you trembling with “analysis paralysis”, and unable to make concrete trading decisions I must remind you of one of the greatest aspects of trading according to a Hurst Cyclic analysis: whichever analysis is correct, the trading decisions are mostly the same. For instance using the FLD Trading Strategy that we teach in the Hurst Cycles Trading Academy you would have entered a category E long trade as price bounced out of the 40-day cycle trough, regardless of which analysis you believed was the correct one. The only thing that would have been affected would have been the position size of the trade.

S&P 500

Here is my preferred analysis, which has the November 2012 trough as a trough of the 20-week cycle, and we expect price to move down soon into the 54-month cycle trough expected early this year.

Expecting a move down

The sudden jump up into the start of this year distorts the cycle shapes, and if the markets don’t turn down soon we will be dismissing this analysis and turning our attention to the analysis presented here (and previously) in the Nasdaq.

Nasdaq

This analysis has the November 2012 trough of at least 18-month, possibly even 54-month magnitude.

A more bullish outlook

The recent strong move up makes more sense in terms of this analysis, but the market will have to sustain the upwards move for the analysis to stay in favor. Note here the early 40-day cycle trough implying that the current bounce is out of an 80-day cycle trough. Troughs occur early when the underlying trend (combined effect of longer cycles) is bullish.

Euro/US Dollar

The Euro has not been so enthusiastic about the new year, and it continues to display regular cycle shapes. The only question is whether the approaching trough will prove to be a late 40-day cycle trough, or an early 80-day cycle trough. Either way we are short into that trough.

40-day or 80-day trough?

Gold

Gold formed a disappointing, but likely 80-day cycle peak on the second day of this new year. It is possible that Gold will muster some strength and form a higher 80-day cycle peak, but if it doesn’t do so soon we will have to wait until the 20-week cycle peak forms in about March

Expecting a turn up

30-Year US Bonds

I was presenting an alternate analysis in bonds before Christmas, but recent price action eliminates that alternate, and Bonds now seem to have fallen back in line with stocks (inversely).

Back in line with stocks (inversely)

Crude Oil

Crude Oil finally discovered some strength and has risen to a higher peak for the current 80-day cycle. This has formed a slightly more balanced M-shape for the current 40-week cycle. Crude Oil is still expected to turn down into the 54-month cycle trough expected in March-April of this year.

More bounce

US Dollar Index

The Dollar bounced up into the new year following the formation of a late 80-day cycle trough, which we identified before Christmas. Of course the bounce out of the 80-day cycle trough is expected to be proportionally strong, but I continue to favor the more bearish outlook for the near term which has the dollar forming a 54-month cycle trough later this year.

Too little too late?

Happy New Year and profitable trading!


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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8 thoughts on “New Year Bounce – 5 January 2013

  • jim

    hello Sentienttraders,

    At the end of last year i started following your method to see what its like on the s&p analysis page. you also have a page for the euro/dollar.
    my question; the pages haven’t been ‘live” for a while are they going to be any time soon?

    thanx and goodluck! Jim

  • Kim

    I follow you off of F Fearcasters. I have read these often but still do not garner what you believe will happen. Can you give me somehwere to go to understand the basics of what you’re predicting? Thanks. Happy New Year

    • Paul Johnson

      Hello and Happy New Year to you too. Thank you for your question.

      To get a better understanding of the underlying Hurst Cycles Principles, please take a look at the video “Cycles in Financial Markets”, which you can find here.

      Generally, David writes about interesting cyclic events that are looking likely in the 2 week to 4 month time frame. A lot of traders say they find this useful input for their own trading decisions. If you are looking for specific trading advice, week by week, then I would recommend you take a look at our FLD Trading Strategy.

  • Derek

    Hello David,
    How does the analysis with the 54 month starting August 2007 have a 54 month trough coming early this year? Are you now phasing the 54 month at the ’09’ lows?
    Thanks for the input

  • Karl

    David, thanks for the update. I had a question for you about which security to track. I’m looking at the Japanese market, and I’m getting different cyclic models for the Nikkei , EWJ (the tracking security) and several others that I’ve looked at. The difference is fairly material (with the NIKKEI showing a 40w+ low in mid-Feb vs. a 20w low having just past on the EWJ). Do you have any advice as which security to follow the model of the index vs. various tracking securities, or would to track them all and see which performs best? Thanks again.

    • David Hickson Post author

      Hi Karl. I don’t track the security you mention and so I’m not sure I can give you a good answer. In general though when an index and a tracking security differ in their analysis it has to do with a currency conversion that happens between the two. It makes for an interesting situation. I would track both analyses, and also keep an eye on the currency analysis – the USDJPY is inverted in my opinion (synchronized peaks) which makes it particularly complicated.