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, April 7, 2012

Apr 7 - Daily and 60-min Cycles, Looking for an Edge

If you recall this setup last month (Mar 6 - Daily and 60-min Cycles, Looking for an Edge) failed. We did not get a divergence bottom on the 60-min pullback before the next 60-min cycle, nor did the Daily Cycle main indicator peak. This bull move since December continued up with no meaningful correction.

The reason I am bringing this up again is because the same setup is just about to occur again. My 60-min system is one candle away from issuing both a sub-cycle and cycle top signal. Assuming that Monday opens the way the Friday futures suggested, then we will have those signals confirmed.

I want to give the (updated) stats associated with this setup because they are compelling. BUT as the failed setup of last month showed, even a compelling statistic is just a statistic, it is not a prognostication. There are always exceptions / failures which is why no stat is 100%. But with the extreme overbought / divergence conditions at play here, I really doubt that this setup will fail twice in a row.

I have explained previously that the trading signals that I post are sub-cycle top and bottom signals. However, I also occasionally relay what is happening with my cycle signals. I don't trade them, but there is a wealth of statistical information that I get out of running studies, several of which have paid off tremendously over the last 6 months.

Today will be another similar study.

Because the Monday open will likely result in both a combined sub-cycle top (tradeable) and cycle top signal on my 60-min system. Now, does that mean that I think we will have a 'major top' here? Nope. I think for a number of reasons that is not the case, not the least of which the statistics from my trend system say to not expect such an outcome.

Recall several weeks ago this post, Why I am not looking for 'the top' with the next pullback, whenever it happens. Here is the summary position from the post (but you should really read it):

The Daily Trend System long signal is still on a buy. The last four weeks the 60-min System was also on the upcycle half of the new cycle (see this post from March 16). However, because the main indicator on my Daily System was still increasing right alongside price since October, what were the odds that this peak will be a 'major top'? And my study results showed that there was a 90% chance (18 out of 20 Daily Cycles) that this price peak would not be the top of this Daily Cycle (i.e. 90% of the time the price goes higher after my main Daily Indicator peaks, which it has not yet done).

So the point of this post is two-fold:
1) Reiterate that point. Statistically speaking, there is little evidence that the price peak that we just saw is a 'major top', and instead the next pullback will be a dip you want to buy
2) Show some relevant stats regarding the 60-minute cycles to help navigate this pullback.

The 60-min cycle signal will occur Monday morning with a gap down (assuming we get one) which will likely put us in some sort of decent correction. The indicator that I have developed to track pullbacks on the 60-min system has not bottomed yet. And in fact, 61 out of 68 60-min cycles (90%) did not bottom at the peak of my 60-min indicator. This means that statistically speaking there is a 90% chance of lower lows before the real dip-buying opportunity presents itself (i.e. that the first large spike down is almost never the bottom of the correction after a 60-min cycle top signal is issued, the early March pullback being a rare exception).

So, in summary:
-- 60-min System says there is a 90% chance of lower lows before the bottom is seen in the downcycle half of the next 60-min cycle assuming Monday opens as expected (and the *average* downcycle half duration is ~20 days)
-- The Daily System says there is a 90% chance that the price peak that we saw was not a 'major' top and that we should expect higher highs before the current Daily cycle is over (i.e. that the bottom of current 60-min cycle is a dip that you want to buy from a Daily Trading Standpoint).

The reason I think this post is useful is that the Daily Cycles (which average 445 days in duration) represents a nice intermediate balance between the timeframes that position traders and investors look at.

Again these are statistics, not prognostications .... past performance is no indication of future results ... yadda, yadda, yadda. Read the binve standard disclaimer... yadda, yadda, yadda...

So in short, I think the next pullback (which we are now in the middle of) 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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