Last week I presented an argument for an approaching peak in the US markets, and I drew some parrallels with other markets around the world. I also discussed a vital aspect of the cyclic analysis of markets: the concept of relative as opposed to absolute value. This week saw the US markets steaming upwards to new highs, but the relative value of those markets for someone in Europe (such as myself) actually dropped this week, because as much as the US markets rose, the value of the US Dollar fell further. That is why I describe this week’s price action in the US as a mythical bull.
I maintain that worldwide markets are peaking and turning down (most have already peaked as discussed last week). And that the US markets will follow course soon enough. From the perspective of someone who bases their perception of financial value in the Euro the US markets have already peaked and are falling (see last week’s ST Outlook), but of course from the perspective of someone who values markets in US Dollars, the markets are still rising. And this week’s “mythical bull” has raised an interesting analysis dilemma, which is resolved using an analysis that I started presenting in these pages over a year ago. Some analyses lose popularity for a time but they don’t die!
The analysis dilemma we are presented with this week has to do with the shape of the current 18-month cycle. (If you know me well enough you probably guessed it had to do with cycle shapes!) Here is the analysis that we have been working with for the past while:
I have marked with different colors the shapes of the current and last two 18-month cycles. The first (white) cycle was bullish as would be expected when rising out of a 54-month cycle trough. The second (blue) cycle was less bullish, as expected. The current (yellow) cycle is the problem: according to this analysis it is expected to be less bullish than the previous cycle, and it isn’t. Now one might argue that the markets are not perfect, and that given the decline in the value of the US Dollar recently it is only natural that the cycles are being distorted. That is true, and might turn out to be the answer, but there is another possibility: that the US markets are responding to a six-year harmonic echo of a cycle. I presented this concept originally over a year ago, and have mentioned it occasionally since then (see the ST Outlook for 14 April 2012 and the ST Outlook for 11 August 2012).
The six-year cycle is not a part of Hurst’s original nominal model, and many Hurst purists will have reservations about it, but I believe that it is an harmonic echo (4 x 18-month cycles resonating with 1/3rd of an 18-year cycle). Here is an updated look at this analysis:
This analysis expects the current 18-month cycle to be bullish in shape because of the effect of the longer cycles. I have drawn arrows on the chart showing that effect. It is the strong bullish impetus of the 54-month cycle that might be giving the current 18-month cycle its bullish shape.
Which of these two analyses is the right one? At the moment it is too early to tell, but before you throw your arms up in despair at the complexities of cyclic analysis let me remind you of something very important: the difference in implication between these analyses is a matter of degree of price move, and subtleties in the developing cycle shape (earlier or later peaks, relatively higher or lower troughs). Both analyses have the same short and medium term implications, and both analyses interpret the current upwards move as approaching a peak before a fall into a 20-week cycle trough. The only difference between them is how far that bounce is expected to carry, and whether the impending peak will occur earlier or later. Here are close up views of both analyses:
Those white arrows show the expected downward move into the 20-week nest-of-lows. Note that both analyses expect a peak to form in the market, which is why I continue to expect the same.
There is not much to add with respect to the Nasdaq, which also reached new highs this week. The most likely analysis that we have been watching remains the most likely, and here it is:
This chart provides a very clear picture of how the current 80-day cycle has been stretched upwards.
The Euro continued its upwards progress this week, making last week’s assertion that 24 July 2012 was a trough of 18-month magnitude all the more likely.
The upwards acceleration we are seeing in the Euro is the sort of price action more usually seen in commodities, which have synchronized peaks, and usually form sharp isolated peaks. I have mentioned before that forex pairs can often be analyzed “either way up”, and they do have a tendency to switch the synchronization of their cycles from troughs to peaks and vice versa. It is possible that we are witnessing such a change in the Euro/US Dollar pair, but it is too soon to know for certain. Either way the Euro must form an 80-day cycle trough some time in October. If the peak it forms is sharp and isolated, followed by a rounded complex trough then we will consider inverting the analysis.
Speaking of accelerating upwards moves, Gold has continued its upwards surge towards what is expected to be a sharp isolated 40-week cycle peak, as discussed last week:
30 Year US Bonds
Bonds get the Hurst prize again for perfect cyclic behavior (and for making me look good!)
They will need to pull themselves together soon and muster some strength to climb to the 80-day cycle peak in late October, but that might well be a disappointing peak.
Oil bounced up this week from the 80-day cycle trough in a steady, albeit slightly weary way.
The 80-day cycle trough might have formed on 30 August 2012 as mentioned last week, but it could also be placed on the trough of 7 September 2012. Oil reached the $100 target that I proposed several weeks ago, and there should be more bull in it yet, but the clock is ticking and the longer cycles are turning downwards.
US Dollar Index
We have been watching two analyses in the US Dollar lately: one which indicates that the 20-week cycle has already formed, and one which still expects it to form. Last week I favored the latter because of the continued move down, but as that move extended downwards this week the strength of the move turned the odds back to the former analysis, and the current drop looks as if though the US Dollar has succumbed to the move down to the impending 18-month (at least) cycle trough that has made me bearish the US Dollar for a few months now.
Whether the 80-day cycle trough has occurred already could be debated. It seems likely that it has – a subtle trough on the way down, which would indicate that we are in the last 10 weeks of the move down to an 18-month cycle trough (possibly a 54-month cycle trough). If it hasn’t occurred yet we might see a bit of a bounce before the downwards move continues.
In conclusion today I would like to highlight again the difference between analyzing a market according to Hurst’s Cyclic Principles, and trading that same market. Because we are expecting a peak to form in the US markets, does not mean that we are short those markets. On the contrary, we are long the US market and will remain long until that peak does form. Of course it is not as simple as it sounds: how, for instance do we know when that peak has formed? We use cyclic tools to do that, but the point I wish to make is that analysis informs trading decisions by letting you know what is coming next, and while we might be long the markets at the moment, knowing to look out for the approaching peak helps to maximize the profit we take from the market.