I analyze macroeconomic issues from a fundamental perspective, and I analyze market behavior from a technical perspective. Original macroeconomic analysis can be found here and both macro analysis and commentary can be found on my Caps blog. If you like or appreciate my analysis, please add yourself to my Following List

Saturday, February 25, 2012

Why I am not looking for 'the top' with the next pullback, whenever it happens

The market continues to go up. And the long signal on my Daily System that was issued Oct 10 is still very much intact.

At some point we are going to get a pullback. And eventually there will be a pullback that manifests as a down cycle on my 60-minute system (which has not happened yet. All of the failed signals on the 60-minute system in Jan-Feb have been failed sub-cycle tops). We started a new 60-minute cycle on Dec 23, making the current cycle 64 days long. Out of 67 60-min cycles since 2001 the average duration for a cycle (which is both the upcycle half and the downcycle half) has been 56 days. And the upcycle half of the current cycle is already longer than then average duration, which makes this rally 'mature' from a cyclical perspective.

But the point of this post is *NOT* to call for a top of some sort here, it is merely recognizing the fact that we will get some sort of top eventually, that will be deep enough to register the start of the downcycle half of the current 60-minute cycle.

The question I pose is this: Will this mark 'the top' (i.e. the start of a several month / several year down market).

And when I look at my Daily Trend System, it says pretty definitively: don't bet on it.

The study I ran this morning looked at the position of my main indicator on my Daily Trend System which has been increasing right alongside price since Oct 10. And my Daily Trend System measures cycles in the same way as my 60-min System (full cycle has an upcycle half and a downcycle half, which is not governed by time but by indicator settings, see this post for more details: Dec 8 - Daily Cycles, Looking for an Edge).

I formulated my study in the following way: Assume that my main indicator (which has not yet topped) tops right now due to a pullback (which would be met with a downcycle on my 60-min system). What would be the odds that this price peak would also be 'the top' of the current Daily upcycle?

The stats are pretty compelling: Since 1982, 18 of 20 cycles (90%) made higher price highs after the initial peak and rollover of my main indicator.

Which means that the odds of the next price peak being 'the top' are pretty small, at least from my viewpoint.

Again these are statistics, not prognostications .... past performance is no indication of future results ... yadda, yadda, yadda.

So in short, I think the next pullback (whenever it happens) is not a 'short it and forget it' type event. I think it will be a dip that will be worth buying.
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