Over the past three months the US indices have exhibited a rather marked divergence in relative strength. This is particularly evident in the Russell 2000 and the Nasdaq 100.
The chart below is a daily chart of the Russell futures. The price wave shown at the bottom of the chart is the 80 day wave extracted using Hurst’s bandpass filter. The shorter wave above it is the 20 day wave and the envelope is ostensibly the sum of the waves longer than 40 weeks. It easily can be seen that the 80 day wave formed eight (8) consecutive higher 80 day highs. That streak appears to be on the verge of being broken.
One of the more difficult issues to resolve in cyclic analysis is identifying and properly phasing duration fluctuations. We know that the average period of a price wave drifts slowly over time, but the cycle-to-cycle change sometimes can be quite dramatic. The current oscillation of the 80 day wave presents such a situation. The filter output suggests that the 80 day low may have formed at the end of March. However an argument can be made that the 80 day formed in the middle of April. Resolution of this dilemma can sometimes be made by analyzing the shorter price waves, or at the very least keep one on the right side of the trend.
The chart below is a 4 hour chart of the Russell futures with the 10 day wave extracted at the bottom. Coming out of the February 80 day low, the price action formed a series of higher 10 day lows and higher 10 day highs. The last few weeks the pattern is not as clear. If one assumes that the mid-April low is the 80 day low, if long, a tight stop based on the 10 day wave would be very prudent.
Here is the same chart of the S&P 500 futures. Not as weak as the Russell, but not awe inspiring from the long side either.
For those so inspired, additional fine tuning is available through shorter waves.
The next several days will determine whether the intermediate uptrend is still intact or whether the indices are in the early stages of a change of trend. Due to the relative weakness of the NDX and RUT with respect to the S&P 500 and that the trend underlying the 40 week wave has turned down, the risk has shifted to the long side of the market.