The M Shape – 6 October 2012 4


Last week I banged on about the insignificance of the trough that has been forming in many of the markets that we follow. Today I would like to expand upon this topic by discussing why I continue to expect this trough to be insignificant, and describe how that has to do with cycle shapes (you probably guessed that)!

By which I mean the shapes that the cycles which influence the price movements of financial markets tend to impress upon that price movement.

That shape is a simple M-shape. There is a large amount of information available in our learning zone which explains why this M-shape manifests and so I won’t go into that here, but I would like to highlight several potential M-shapes which are developing in the markets at the moment, which explain why the trough that has now formed in markets around the world is doomed to insignificance, and also illustrates in real-time why the formation of a peak in markets tends to be a complex affair.

By the way the M-shape is best visualized as an M in a different font – where the center bit of the M is not as deep as the font that our designer chose for this blog. As my three-year old son describes an M: “it is like an A, but with a bumpy bit at the top”. That bumpy bit is where we are now.

S&P 500

The M-shapes of cycles are rarely perfect, they will stretch upward or downward, but they are consistently M-shaped.

There is a short-term M which at present is perfectly shaped:

A potentially perfect, but incomplete M-shape

However I must stress that this is only a potentially perfect M-shape. The second peak is not yet confirmed. The arrows on the chart show the legs of the cycle shape that are still unfolding. If the markets turn down from here then the M-shape that is left will be a perfect shape.

There are always M-shapes developing at several degrees of cycle wavelength. Here is a longer-term M-shape:

A 40-week M-shape

Again I must emphasize that the second peak of this M has not yet formed, but given the fact that the 18-month cycle is heading down towards its trough expected at the end of this year the second peak in the M is not expected to be higher than the first peak.

While we’re at it here is an even longer M-shape which you can see is distorted to the upside:

An 18-month M-shape

I have recently presented a chart which expresses the value of the S&P 500 measured in terms of Gold. Here is an update on that chart, with an M-shape drawn in:

Bouncing out of a 20-week trough

This chart presents a different picture which is why I find an analysis of relative value charts so useful. The chart tells us that the US markets (or the S&P 500 in particular) is bouncing out of a 20-week magnitude trough, which won’t be as impressive as the bounce out of the 40-week cycle trough in June, but should be more impressive than the insignificant trough I have been discussing in the actual market price. How is this possible? How could we get a big bounce in the relative value of the S&P 500, but a smaller bounce in the actual value? I believe that the answer is that the value of Gold will fall and that the value of the S&P 500 will fall less, resulting in the required bounce up in relative value.

Nasdaq

The Nasdaq was significantly weaker than the S&P 500 and the Dow Industrials this week, creating its own particularly bearish M-shape. 

A more bearish M-shape

This developing cycle shape makes the trough of two weeks ago likely to be of only 20-day magnitude in the Nasdaq. The varying magnitude of a trough between different markets increases the likelihood that this trough (and the bounce that is following it) will be prove to of low significance.  The ongoing fractured nature of the US markets is certainly not a bullish sign.

Euro/US Dollar

The Euro has also been transcribing an M-shape, but it is possible that the Euro is going to stretch to the upside, and that the trough formed this week will turn out to be the 80-day cycle trough that we have been watching for, at a nearly perfect nominal length of 69 days. As discussed last week this would mean that we expect higher prices within the current 20-week cycle, in other words we expect the peak of 17 September to be exceeded.

Bouncing out of the 80-day cycle trough

Gold

Gold has manfully struggled upwards. I expect this peak to be a sharp isolated affair, and there is nothing particularly sharp about the current form, and so I wouldn’t be surprised to see Gold jump over the $1800 level and form a spike peak.

Reaching for a peak

I have mentioned a few times recently that the 40-week peak we have been watching might prove to have been a subtle affair, and that the peak Gold is now reaching towards will be a peak of the 18-month cycle. That certainly gives us more time for an isolated peak to form, but it has more bearish implications in the long term for Gold.

30 Year US Bonds

Last week we expected a peak in Bonds and this week they obliged:

The 80-day cycle peak?

That might be a peak of 20-day magnitude, but the sharp fall on Thursday and Friday raises the likelihood that it is in fact the peak of the 80-day cycle, and the days of perfect cycle shapes in bonds might be over.

Crude Oil

Oil has an M-shape in the making which has bearish implications:

Down towards the 20-week cycle trough

It is also possible that the 80-day cycle in oil has only formed this week and that we will see a bullish surge, but the odds of this are diminishing: 

A possible 80-day cycle trough

Note that this analysis has an unsatisfactory 40-day cycle trough in mid-August, but it is not impossible. I will be watching oil closely to see whether the current bounce has the strength needed to tilt the odds in favor of the latter analysis.

US Dollar Index

The US Dollar spent the week falling into the first 20-day cycle trough since the 20-week cycle trough of 14 September 2012. The speed of the fall was not unexpected given the bearish underlying trend in the dollar at the moment. The new M-shape is expected to be a bearish one.

20-day cycle completing

That sharp move down this week contributed to the perfect M-shapes that are potentially forming in the US markets: there is no getting away from the interactions between the markets, and the concept of relative value.

As I covered my short trades and entered long trades this week in many markets I was struck by the irony of writing what has been a bearish market commentary of late, and yet taking bullish positions in the market. I have tight stops on those bullish positions because of all of the above, but nevertheless the dichotomy between analysis and trading reared its head again, which is why I am so excited about our new project which will be focusing on the trading decisions one makes as a result of the analysis that we perform on the markets. If you haven’t yet let us know what your questions are when it comes to trading with Hurst Cycles, make sure you do that now: Two Questions

And finally remember to like us, or do your social thing if you haven’t already. Perhaps you could like us twice? I’m not sure really, but it’s worth a try (or you could +2 us?)

 


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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4 thoughts on “The M Shape – 6 October 2012

  • sam shah

    Hi
    I would like to just get buy and sell signals because my analysis is wrong. All this commentary is good, but I would like to know when to buy spy and sell it. That is all I need to know, 40 or 80 cycles won’t make me money.

    thanks

    • David Hickson Post author

      Hi Sam
      Your sentiments are shared by many, which is why we have been working very hard on a project that we are announcing this week which focuses on the trading of Hurst Cycles, as opposed to pure analysis. Make sure that you are on our email list and you will hear all about it.
      If by the 40 and 80 cycles you mean the 40-day and 80-day cycles I would beg to differ. The longer the cycle the more money you can make because of the greater amplitude of that cycle, although of course the progress of the cycle is slower. Shorter cycles make more money because they offer more trading opportunities within a particular period of time, but there is a “sweet-spot” which depends on your ideal trading time-frame, and understanding the longer cycles is vital to your success in trading the shorter cycles.
      David

  • Rashid

    Hi David,
    I like to know more about signals also is there a away that I can put a list of Stocks, Futures in the software, and the software will alert me when the signal is generated.I day trade stocks but keep an eye on ES, NQ, CL, and 6E.
    Thx
    Rashid

    • David Hickson Post author

      Hi Rashid
      Sentient Trader will not generate signals in the way that I think you are speaking of, in other words you cannot give the software a list of stocks, and expect automatically generated signals in return.
      On the other hand Sentient Trader does have extensive alerting functionality, but it is important to realize that the software does not automatically generate these “signals”. A chart must be created by the user for each instrument, the analysis will be performed by the software, but that analysis should always be carefully considered and if necessary adjusted by the user. Trading opportunities can be identified by the software (and sent to you as an alert), but final trading decisions can only be made by you, the trader. Sentient Trader does a good deal of the work, but it does not, and never will do everything!
      Take a look at our new FLD Trading Strategy which is a mechanical trading system that gives you the tools to make your trading decisions profitable.