For the past few weeks I have been presenting two possible analyses for the US markets. The difference between them is simple, but crucial: was the trough in November 2012 a trough of 20-week magnitude (which is my preferred analysis) or was it a trough of the 18-month cycle?
The continued upwards move this week has not ruled out either analysis, and my preferred analysis remains the most likely analysis in my opinion (call me stubborn!)
But what is the difference between the two analyses in terms of what is going to happen next?
If the November 2012 trough was of only 20-week magnitude then we expect the market to fall soon, in a hard and fast decline into the 18-month (probably also a 54-month) cycle trough expected by about the beginning of May, as shown here:
If on the other hand the November 2012 trough was of 18-month magnitude then the situation is a little more complicated because the sequence of the last three 18-month cycles does not seem correct. If they were the three sub-cycles of the 54-month cycle then you would expect a progression from bullish to neutral to bearish, and the most recent 18-month cycle was not bearish, but in fact more bullish than the previous cycle. I have introduced in these posts before the concept of a non-Hurst six year cycle that seems to have been dominant in the US stock markets recently. I won’t present the whole argument here again, but suffice to say that the sequence of bullish – neutral – bullish again that we have seen is explained by including the 6-year cycle in the analysis, as shown here:
And so what do we expect if this is the case? The next 18-month cycle is the middle sub-cycle of the 54-month cycle (and so gets a neutral impetus from that cycle), and it is the final sub-cycle of the 6 year cycle, which implies a good deal of bearish pressure. The last time we witnessed an 18-month cycle which was the final sub-cycle of a 6-year cycle was in 2008.
And so whichever analysis turns out to be the true one, things are looking bearish. The only difference really is how soon the bear will strike, and how hard.
Here are two charts of the S&P 500 showing my preferred analysis, which expects a downwards move soon to bring the market down into the trough of the 18-month (and in this scenario, 54-month) cycle.
The bar counts show that we can expect the trough to form in about 8 weeks to 3 months time.
I am presenting the alternate analysis in the Nasdaq, where it is more acceptable because of the August 2011 trough, which can be phased as the trough of the 18-month cycle as opposed to the October 2011 trough.
If the November 2012 trough was of 54-month magnitude as shown in the above chart then it will most probably turn out to be a straddled trough. Price action is usually fairly symmetrical surrounding a straddled trough, and so we might see price coming up to the levels of the September peak before turning down.
The way in which price and the 20-day FLD were interacting puzzled me at the beginning of the week, but then I realized that the cycles were running short in the Euro, and that the trough of Friday 4 January 2013 was a trough of 80-day magnitude. I published a video about it just in time to catch the move.
The Euro is looking bullish now, but eventually the 40-week cycle will exert its influence and pull the Euro down into the 40-week cycle trough expected in about April/May this year.
I thought that it would be helpful to take a step back and look at the bigger picture in Gold as well. The W-shapes are clear in the first 40-week cycle following the September 2011 peak. Now of course Gold is expected to complete the bigger W-shape for the current 18-month cycle that has the 40-week cycle peak of October 2012 as its center point. Price is falling now to the second trough of the W, then it is expected to pull back up to the final peak of the 18-month cycle expected in about July this year.
30-Year US Bonds
Speaking of W-shapes: Bonds should gather some strength soon to pull up towards the 40-week cycle peak expected in April/May this year.
With all the noise around the two possible analyses in the US stock market, Crude Oil provides a much simpler and clearer picture. There is no question here that the November 2012 trough was a trough of the 20-week cycle. A peak should form soon and oil will start the downwards journey to the 18-month (at least) trough expected in about April this year.
US Dollar Index
The US Dollar is putting up a fight, but there is little doubt now that the 54-month cycle trough we discussed last week still lies ahead. The bar counts show how the cycles have been stretching, but it looks as if there are about 7 weeks still to go.
That wraps up this week’s outlook. I am sorry to be the bearer of such bearish tidings, but that is what I believe the cycles are saying.
Have a great week, and profitable trading!