The markets have been behaving very well in cyclic terms, finding support this week at the 20-day FLD as expected. We are now expecting price to drop down through that FLD to form a 40-day cycle trough next week, as can be seen in this chart of the S&P 500 (ES futures):
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Because price has been bouncing out of an 18-month cycle trough (see this post) the current 40-day cycle is very bullish. But as price pushes to new highs in the S&P 500 and Nasdaq, and fails (so far) to reach new highs in the DJIA, the US market is beginning to look a little fractured. A fractured market is not what we expect to see so early in the 18-month cycle. If the markets falter here then there is the danger that this 18-month cycle trough could turn out to be a straddled trough, which has very bearish implications.
It is much too early to be calling this a straddled trough, but we need to watch carefully as the move unfolds. I like to watch the cycle shapes as they develop. Here are the recent cycle shapes of the 40-day cycle:
There are two basic components to a cycle shape:
- Where the PEAK of the cycle occurs. An early peak creates a bearish cycle shape, and a late peak is bullish.
- Where the final TROUGH of the cycle occurs. This is fairly obvious: if the trough is higher than the start it is a bullish cycle, otherwise it is bearish.
The current 40-day cycle is already looking very bullish because it clearly has a late peak. But as price comes down to the 40-day cycle trough it will reveal its full shape. And as price bounces out of that trough we will be looking for another bullish shape to confirm that the current 18-month cycle is not turning bearish just yet.
Short and sweet this week! Have a good week, and profitable trading.
