For the past few months we have been discussing two analyses in the US markets (with comparisons to other stock markets around the world). The two analyses differ primarily in one respect – the magnitude of the November 2012 trough, which was either of 20-week magnitude, or 18-month magnitude. Sometimes one can become so caught up in the analysis that one loses sight of what the analysis means, what it is telling us to expect.
Interestingly both analyses are telling us the same thing: the stock markets are vulnerable to a strong move down. How strong and how soon this move will happen differs between the analyses, but the message is clear: be prepared for a fall.
S&P 500
We have been tracking the more bearish of the two analyses in the S&P 500, which considers the November 2012 trough as a trough of the 20-week cycle. This implies that the market will soon fall into an 18-month cycle trough, presently expected by about the end of April:
In recent weeks I have been discussing the formation of the peak, and suggested two weeks ago that we might see the peak form around a straddled 40-day cycle trough. The trough on Monday fits that bill, although it occurred fairly early if the 4 February trough was a trough of the 80-day cycle. That trough was hidden as discussed last week, and might very possibly have occurred the week before, as indicated by the bar count on this chart:
Bear in mind that a straddled trough will have fairly symmetrical price action on each side. So far that condition is being met, but it is too soon to call this a straddled trough with absolute confidence. This chart also shows the 20-day FLD (that purple line). Notice how price has kept returning to that line over the past 10 days. If it crosses above the line on Monday of next week that would generate a target for the upwards move of about 1535. If it crosses later in the week the target would be lower. And so the FLD is warning us to expect a symmetrical price move with the formation of a peak near the levels of two weeks ago.
What does a straddled 40-day cycle trough mean at this juncture? It warns that the peak of the current 20-week cycle is completing (formed at either the peak preceding or following the straddled trough), and that the market will fall.
Nasdaq
We have been considering the alternate analysis in the Nasdaq: that the trough of November 2012 was a trough of the 18-month cycle. That might sound like good, bullish news, but in fact it is not. As discussed over the past few weeks the dominant cycle (most visually apparent cycle) is the 40-week cycle in the Nasdaq, which warns that we should expect a subtle 20-week cycle trough (which might be a straddled trough – see the discussion of subtle troughs). The 20-week cycle trough probably formed in the market on Tuesday, as can be seen on this chart:
There is a chance that the Nasdaq will form a lower 20-week cycle trough in the coming weeks, but one of the reasons that I think this is unlikely has to do with the 20-week FLD. If you have studied (or are studying) the FLD trading strategy you will recognize this as a category B interaction. Observe how the FLD has provided support to price over the past few days. From here price could bounce up a bit more to complete a C interaction, and then the next move to prepare for will be the fall downwards. The 20-week cycle trough that formed on Tuesday has the potential to develop into a straddled trough, which has the same bearish implications as the potential straddled trough in the S&P 500.
Euro/US Dollar
This week the Euro continued the fall into the 40-week cycle trough. The 40-day cycle trough was indeed little more than a hesitation on the way down as I suggested it might be. The 40-week cycle trough is still expected to form some time in March.
Gold
Last week we took a step back and discussed the bearish shape that is developing in Gold. The yellow metal bounced up into a likely 40-day cycle peak this week, but then dropped away again, indicating that the bearish pressure is still strong. Gold is still expected to form the 20-week cycle peak in April, but it might be a disappointing peak given the bearish pressure of the longer cycles.
30 Year US Bonds
Bonds also formed a clear peak this week, most probably a peak of the 20-day cycle. Bonds are also expected to form a 20-week cycle peak in about April, and it should be a more impressive peak than that formed in Gold. Notice how price has recently been bouncing between the 20-day and 80-day FLD’s. Price should soon cross up above the 80-day FLD.
Crude Oil
Crude Oil gets the Hurst award for excellent cyclic behavior this week. For a better understanding of what happens following a straddled trough, look at what happened in Crude following the straddled 40-day cycle trough in the beginning of February. The big nest-of-lows in mid-March is an expected trough of at least 18-month (possibly 54-month) magnitude.
US Dollar Index
I first suggested that the trough of 1 February 2013 might be a trough of the 54-month cycle a week after it formed. The trough was early, but the continued upwards move following that trough has been strong enough to confirm the trough as one of at least 18-month magnitude. This week I am taking a step back in the Dollar to look at the past three 18-month cycles. It is possible that the 1 February trough was a trough of the 54-month cycle, but more likely that it was of only 18-month magnitude as shown in this chart:
The next, or now current 18-month cycle is expected to be less bullish than the previous one, and so although we are likely to see the Dollar exceed last July’s peak I am not optimistic (yet) of seeing a climb above the 2009 highs.
Have a great week, and profitable trading!
