Cycles Theory

My recent trade reviews took me a lot of time, so I haven't been able to make a decent post about the stock market and gold. I think it's time to look at where we are at the moment. I started to implement a cycle theory into my trading, so I'll devote this post to short term cycles in stocks and gold.

On SPX chart below I've marked the daily cycle lows (blue arrow) since the last weekly cycle low (black arrow) and half-daily cycle lows (green arrow) from the last daily cycle low. The usual timing band for the shortest cycle I follow, which is what I call a half-daily cycle, is around 15 days. The current HD cycle is 13 days old and should find a bottom sometimes this week. The current daily cylcle (D) is 29 days old and should find a bottom within its normal timing band between 35 and 45 days. The weekly cycle (W) is 13 weeks old and still has plenty of time to develop as W cycles tend to last from 20 to 25 weeks on average.

My expectation for this week is that stock market will make a swift two to three day drop. How deep will it go is impossible to predict. I guess somewhere between 1225 and 1250 would be a nice level for a bottom. The bottom of the next HD cycle will also coincide with the bottom of the next D cycle, which means that the correction will be deeper. I expect the next HD cycle will top in no more than 6 days and it will not go above highs of the current HD cycle. I also expect the next D cycle will bottom above the bottom of the previous daily cycle as we now have two consecutive HD cycles with higher highs, so there is plenty of support below.

Now, the most important question is whether current weekly cycle has already topped on week 4 at about 1290 level. I think it has. Reasons why I think so are following. First, we are in a bear market. In bear markets weekly cycles tend to top in the first 8 weeks. A later than 15 week top seems almost impossible to me. Second, volume properties simply don't suggest any major accumulation. D and HD corrections are deep, which is not typical for weekly cycles that want to reach new highs. We'll talk about this when current cycle develops a little further.

And now to gold. The biggest question is of course whether gold has already formed long term bottom. I think not. The main reasons are two. First, gold W cycles usually last between 15 and 20 weeks. Previous cycle was 13 weeks long and if current W cycle already bottomed, it should be 13 weeks long also. Two very short cycles in a row are unlikely. Second, the rally out of W cycle should be furious. The current HD cycle we are seeing right now is on low volume and it looks like it already topped on day five, which is also not positive. I think we will see at least two more D cycles before this W cycle finally bottoms. I expect this will happen sometimes in late February or early March.

I know these are pretty bold predictions. I'm actually not too concerned with long term weekly cycles. Daily and half-daily cycles are useful for timing trades. I'm looking to go short both stocks and gold as soon as we get a confirmation that both still have weekly cycle lows to print.