Peaks versus Troughs – ST Outlook 22 September 2012 9


We have some exciting developments in the pipeline at Sentient Trader, and as a part of that our weekly analysis of the markets has moved to a new location on our site. Some of our readers were treated to an omnibus of past issues this week when we made the move, but apart from that unexpected treat the move will not affect you in any way. Except that we have become a great deal more interactive: we have a new (and functioning) comment system so that you can get involved in the conversation. I look forward to hearing your thoughts about what is happening in the markets.

We are also now extraordinarily social! You can like us on Facebook, follow us on Twitter, connect with us on LinkedIn, subscribe to our YouTube channel, or do whatever it is that one does on Google + (I’m a bit of a dinosaur when it comes to all this social media stuff). Contribute to the Hurst renaissance by heading over to our site and doing one (or all) of those things, because that helps us to spread the word about how to truly understand financial markets.

A few weeks ago I introduced the concept of cycles in relative as opposed to absolute value, and this week as a potential trough formed in the US Dollar, the relative value of the US markets also experienced a turn up even though those markets were fairly flat. We are expecting a peak in the US markets, but when a trough in relative value occurs the situation becomes complex. Complexity might increase the challenge of performing an analysis, but it certainly doesn’t make the task impossible. It simply makes it more fascinating.

S&P 500

There are two analyses that we have been tracking in the US markets. The first has the 80-day cycle trough positioned on 25 July 2012:

Expecting a 20-week cycle trough

Notice the very neat nests-of-lows (the stacks of future trough positions). This is often an indication of a good analysis, and it certainly makes for a more “beautiful picture”. The other analysis has the 80-day cycle trough positioned in late August (or early September, it makes little difference):

Expecting a 40-day cycle trough

In this analysis the nests-of-lows are not nearly so well organized, and there is a clear gap in the 18-month nest-of-lows in January 2013 – there is no grey “synchronous box” connecting the 80-day and 20-week future trough positions. This doesn’t negate this analysis, but it does make it less likely than the first in my opinion.

What is the difference between these two analyses? The first analysis implies that we are expecting the trough of the 20-week cycle to form in the next week or so, whereas the second analysis expects a trough of only 40-day magnitude to form within that time-frame.

In case you’re saying “wait a minute – what do you mean a 20-week cycle trough, or 40-day cycle trough? Last week you were talking about a peak!” Let me remind you of the fundamental principle of Hurst’s cyclic analysis: multiple cycles influence the price movement of financial markets. I am still expecting a peak in the US markets, but that doesn’t mean that we ignore all the other cycles. The cycles never stop moving … in the process of forming this peak the cycles are all ticking along, and troughs will keep forming. The S&P 500 will bounce out of this trough (as all markets bounce out of all their cycle troughs), but in the longer term the markets are turning down.

Here is an updated chart of the value of the S&P 500 in terms of Gold:

Falling relative value

The cycle shapes are much clearer in this chart which is why I always keep my eye on these “relative value” charts. The value of the S&P 500 in terms of Gold has already peaked, and we are now clearly on the bearish side of the 18-month cycle. The relative value will bounce up from an 80-day cycle trough in the short term, before subsiding to lower levels.

Nasdaq

There is not much to add with respect to the Nasdaq, which achieved slightly higher levels this week, on waning strength. We are standing by for the fall into a 20-week cycle trough.

Turning down into a 20-week cycle trough

Euro/US Dollar

Last week we were expecting the Euro to fall from a peak, and it did so this week. It is still too early to tell whether we should invert this analysis, but once the 80-day cycle trough has formed we will take a look at the cycle shape and make a decision about that.

Approaching a 20-day cycle trough

Gold

Gold reached even higher this week towards the 40-week cycle peak.

Stretching up to the peak

Hurst suggested that the cycles that move the price of gold have wavelengths one-and-a-half times as long as the wavelengths of the cycles found in the stock market. That makes the time ripe for the 40-week cycle peak about now, as can be seen from the bar counts on the chart.

30 Year US Bonds

Bonds are fast becoming my favorite market. When I suggest they are peaking they oblige by turning down, and I forecast they will turn up, they do!

Heading up to the 80-day cycle peak

Of course this is because the 40-day cycle is particularly evident at the moment. This dominance of a single cycle never lasts very long, but I’ll enjoy it while it does!

Crude Oil

I warned last week that the longer cycles were turning down, and that Oil was vulnerable to a bearish move. Indeed it was:

An 80-day cycle trough?

The speed of that move down makes it likely that the 80-day trough is forming now, as shown in the analysis on the chart.

US Dollar Index

We have been expecting the trough of the 20-week cycle in the US Dollar, and a very viable trough formed this week:

A viable 20-week trough

The other analysis option, which has the 20-week cycle trough in June is still possible. That would make the trough formed last Friday a trough of 80-day magnitude instead of 20-week. As price bounces out of this trough I will be watching the strength of the move carefully to determine whether it is likely of 80-day or 20-week strength.

That’s it for this week. Don’t forget to like us (if you do), or connect to us, or do whatever those Google + people do. Join our quest to spread the power of the knowledge of Hurst’s Cyclic Principles around the world.


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 Reply to David Hickson Cancel reply

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>

9 thoughts on “Peaks versus Troughs – ST Outlook 22 September 2012

  • tom russo

    if Gold is expected to make 40 week peak and its only 29.3 weeks since last 40 week peak and Gold cycles run longer, how can we expect peak of 40 week magnitude about now?

    thnx

    • David Hickson Post author

      Hi Tom
      The peak 29.3 weeks ago in February was a peak of the 20 week cycle according to this analysis, not the 40 week cycle. The cycle from September 2011 to February this year was 25 weeks long, and the recent average length of the “20 week” cycle is 22.8 weeks, so 29.3 is quite long but not out of the question.
      With this analysis the full cycle from September 2011 is 54.3 weeks, which is long for a 40-week cycle, but also not impossible.
      There is also the possibility that I mentioned a few weeks ago that the 40-week peak formed at the end of July – early August, and that we are now in the next 40 week cycle. The sudden surge upwards might be the sign of a new cycle playing out. That makes that 40-week peak a “straddled” peak which is bit complex, and I’ve learnt that most often the simple answer is the correct one.
      I hope this clarifies things.
      David

      • vito

        I tend to agree with the latter analysis of new cycle playing out David. Also weekly PA in SP 500 may be a sign of temp peak or long term peak(possible) If short term I expect your 80 day trough might be a straddle one lead the way to a final push for the year before it turns down… As the saying goes higher they go , harder they come down !

        Regards V

  • Robert

    When you say regarding the Euro, ‘Last week we were expecting the Euro to fall from a peak, and it did so this week’. When I look at the diamonds to the left, I would think the Euro was probably still bullish. So is it correct to say that you should not have actually sold the Euro this week. Looking at the chart, this down move could extend into November, so how is a trader supposed to deal with this, and do you still expect the Euro to rise out of the 80-day trough to a price level above September.

    Thanks.

  • Karl

    David, speaking of peaks and troughs, it looks like there are peaks approaching in gold and silver (18m), and troughs approaching in the S&P (20w) and the USD (18m?). Given that SLV, GLD, and S&P are all highly correlated and highly inversely correlated with the USD, how do you make sense of what appears to be conflicting cycles? Thanks.

    • David Hickson Post author

      Hi Karl
      That is a fascinating question. The answer I believe lies in the fact that markets which are generally considered to be highly correlated (or inversely correlated) are not in fact so highly correlated (or inversely correlated) at all, at least not over long time periods. As an example take a look at the inverse correlation between the US markets and Gold over the past 20 years. As often as Gold has been inversely correlated to the US markets it has been positively correlated (moving in the same general direction) as well. That is contrary to what one expects and what we have been led to believe by the generalizations that are fed to us by so many economists and analysts.

      One of the reasons that I enjoy cyclic analysis so much is that it provides an insight that allows one to question the constant correlation idea and many other generally held concepts of modern economics.

      I think that one of two things might be happening now:

      • Either the correlation relationship between the various markets is shifting, and Gold, Silver, the US markets and the US Dollar are all going to fall in value together (which is a very bearish outlook and implies a fairly calamitous outcome).
      • Or the correlation between markets is going to remain consistent, and where Gold is peaking for instance we will find a trough in the US markets, but that trough will turn out to be a straddled trough – which is effectively a trough surrounded by two peaks and looks from a distance like a peak (it is a typical “phase-inversion” referred to often by other cyclic theories).

      Which of these two explanations turns out to be the correct one only time will tell, but I always think it is best to follow the cycles carefully, and then answer questions like this later!