Last week I discussed watching the bullishness of the shorter cycles to gauge the general health of the market. The 40-day trough was due early this week, and the US markets continued to beat a perfect rhythm as they formed a small trough on Monday, which was most probably the expected 40-day cycle trough. The shallowness of this trough confirmed the bullish nature of the market, but for how long will this continue? As price bounces out of that trough we need to look ahead and ask where the peak of the current 80-day cycle is likely to form, because that is our next cyclic event, and it is likely to be an event of some importance.
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I have introduced the idea before of measuring the “bullishness” of a cycle, which I do simply by combining the two factors that determine the cycle’s shape: where the peak is relative to the cycle wavelength, and how much upwards movement there is in the cycle compared to the total up and down movement. A perfectly bullish cycle would score 100% and would have the peak on the last bar of the cycle, and would have no move down from the peak to the final trough of the cycle (obviously we don’t see many of those!). Similarly a perfectly bearish cycle would have a score of 0% and would peak on the first bar, at a level equal to the low of that first trough (also not very common).
As the market action unfolds there is a pattern to the sequence of cycle bullishness because of the way in which the multiple cycles that influence the market work together. Here is a chart of the S&P500 (ES futures contract) showing the bullishness score of recent 40-day and 80-day cycles:
The lower line of percentage scores are for the 40-day cycle, with the 80-day cycle scores above them. The final numbers on the right in yellow are for incomplete cycles, and are estimates. The sequence of bullish then bearish then bullish is clearly evident in the 40-day cycle sequence of 63% (bullish); 16% (bearish) and 84% (bullish).
The 84% number is especially satisfying because it is the first 40-day cycle after an 18-month cycle trough, therefore should be more bullish than the previous “bullish” 40-day cycle, but it also reflects the symmetry of the market at the moment, by providing the exact reflection of the previous 40-day cycle with a score of 16% (84% + 16% = 100%)
Symmetry in the market is something that inevitably must fail, because if it were perfectly symmetrical we would have nothing to think about, and trading the markets would be a simple matter of tracking the symmetrical moves (and where would be the fun in that?). But I do find it useful as a tool to help us know what to expect, as long as we bear in mind that the symmetry will fall apart at some time.
And so I have assumed symmetry in the markets and placed those yellow estimates of the current 40-day and 80-day cycles’ bullishness. Assuming symmetry we can work out where the peak should occur, and how far down price will fall to the next 80-day trough. There is an inherent problem here though: we have four variables: the time and price of the peak, and the time and price of the trough. This is an insoluble equation, but we can substitute one of the unknowns with a good estimate: the time of the trough is in early April as shown by the nest of lows for the 80-day cycle.
With only three variables we can make an estimate, which is shown on the above chart, and also on this chart of the DJIA (YM futures contract):
The estimate for the peak in the S&P 500 is Thursday next week, and for the DJIA it is on Monday. Of course this is only an estimate. Because of the number of variables we are dealing with it is impossible to use this method to pinpoint the peak entirely accurately.
Nevertheless I find it a useful method for helping me to prepare ahead of the time for cyclic events.
Have a good week and profitable trading.