The Meaning of New Highs – 9 March 2013 4


The media was all abuzz this week with the “New Highs” made by the Dow Jones Industrial Average which climbed above its peak of late 2007. Less noise was made about the fact that the S&P 500 and Nasdaq have not made new highs, perhaps because people prefer to hear the good news.

It is important I believe as an analyst and trader (or investor) to separate the fact from the fiction, because very often the financial media blurs the line between the two. The fact that new highs were reached in the Dow was widely interpreted as meaning that we should expect further bullish moves from the market. This is a mistake. The fact is that new highs were reached. The idea that this means that we should “turn bullish” is not only fictional, it is deeply flawed.

Of course the new highs in the Dow are exceeding a peak of almost six years ago (six-year cycle anyone?), but there is also a shorter term drama playing out, which has new highs in all US markets. What do these new highs mean? I have been reminded often recently of the market situation in late 2007, and to explore this idea I would like to draw your attention to what “new highs” meant in 2007.

The ghost of new highs past

Note the sequence of three bullish 18-month cycles, the straddled trough of August 2007, which implied fairly symmetrical price action around that trough, and the new highs made in October of 2007. I don’t need to tell you what those new highs meant. Here is what is happening now:

Seeing ghosts?

The similarities are clear. Price action surrounding the trough of November 2012 is stretching the definition of a straddled trough to its limit, with price now about 5% higher than the peak before the trough, but the Nasdaq is still showing a very likely straddled trough:

Looking more likely as a straddled trough

And so what do New Highs mean in terms of looking ahead? New Highs more often occur at or near peaks in the market, and their implication is not bullish, but bearish.

S&P 500

We have been watching two analyses in the US markets for the past few months. Both analyses are still valid, but the move up this week relegates the analysis I have been presenting on the S&P 500 to the less-preferred position. It is still not ruled out however, and we need to be aware of the danger it presents, which is a strong move down into late April this year:

Still possible, but less likely

Nasdaq

The analysis I have been presenting in the Nasdaq is the more likely analysis for the US markets. I suggested last week that price would bounce off the 20-week FLD as it climbed out of the 20-week cycle trough, and that is indeed what it has done. That 20-week cycle trough still qualifies as a straddled trough, and we must be wary of the potential of a hard fall into the 40-week cycle trough expected late May, with an intermediate 80-day cycle trough in April.

A straddled 20-week cycle trough

Euro/US Dollar

There is nothing to add to last week’s comments about the Euro – it is still heading down to the 40-week cycle trough. Here is slight variation on the analysis I presented last week which suggests that trough might occur a bit later, in mid April.

Falling into the 40-week cycle trough

Gold

The bearish pressure on Gold has been strong. We are still expecting the formation of the 20-week cycle peak in April, but as mentioned last week, it might be a disappointing peak.

Struggling to climb upwards

30 Year US Bonds

Bonds continue to look very bearish. It is possible that the peak in late February was an early peak of the 20-week cycle, but it is more likely that we will see the formation of that peak in April.

Early 20-week peak?

Crude Oil

Crude Oil is approaching the 18-month cycle trough. We need to be on standby to go long for the bounce out of that trough, but beware the false bounces that will occur as the trough approaches. Notice how price has climbed up to the 20-day FLD which would provide resistance to a false bounce out of a premature trough.

Beware the false bounce!

US Dollar Index

The US Dollar has continued to soar out of the 18-month cycle trough of early February. A 40-day cycle trough is likely to be hidden, and the first trough we will be able to identify will probably be the 80-day cycle trough expected in April.

No stopping the Dollar

Being able to separate the fact from the fiction, the truth from the noise, is very important to a trader or investor. I hope that this blog helps you to avoid misinterpreting the meaning of new highs. To “turn bullish” now, or to think that just because the market has been going up, it will continue to do so would be foolish. And you know what they say about a fool and his money!

Have a great week 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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4 thoughts on “The Meaning of New Highs – 9 March 2013

  • krasi

    We should be seeing 18 month and 54 month cycle lows and instead the markets are moving higher.
    Could it be that we have 9 year dominant cycle and the “strong move down into late April this year” will be a straddled trough before final high for the cyclical bull and the 9 year cycle turning lower after that?

  • Derek Frazier

    David the dip that took us in to Novembers low was the 18 month trough it appears. It was very early in SP500. Is that what you are thinking as well? This has happened before, with just a small pass through the 18M FLD and boom its up we go. It is not very clear as of today, March 11th.

    • David Hickson Post author

      Hi Derek. Yes that is my preferred analysis – the one I’ve been showing on the Nasdaq chart. As you say price just came below the 18-month FLD and bounced up – very much like a B-category interaction with price (if you’ve seen the FLD trading strategy material), implying that the October 2011 trough was the 54-month cycle trough, and that the August 2007 trough was a straddled 54-month trough. That would explain the bullishness of the 18-month cycle in to November 2012, and also the short cycle because with the 54-month cycle pushing up one expects troughs early, although as you say it was very early which is why I’ve been keeping my eye on the other analysis.