Cycle Trading

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There will be a lot of attention on the Fed and Bernanke’s speech on Wednesday.
So, I thought we could take a look at one possibility.

The dollar is on day 14 and in its primary decline into a daily cycle low.
The normal timing band for a daily cycle low runs from day 17 – day 25 and the dollar appears to be headed for a failed daily cycle.

When the dollar is seeking out its cycle low, that tends to be bullish for stocks and commodities.

However, the dollar broke below its daily cycle trend line 5 days ago and equities still have not found their footing.

Stocks have been caught in the grip of a cycle decline for 15 days.
Until this is a break of the declining cycle trend line, there isn’t.

So far this has been a daily cycle correction.
Yet, as we have been discussing, equities are due for an intermediate cycle correction. Such a correction is usually accompanied by a failed daily cycle. In order to have a failed daily cycle, stocks will need to break below the March 6 th low.

I find it hard to imagine equities breaking below the March 6 th low if the dollar prints a failed daily cycle.

However, here is a possibility that could play out.

Instead of the dollar tanking tomorrow after Ben speaks, it rallies.

Wednesday would be day 15 for the dollar’s daily cycle.

A 14 or 15 day – daily cycle would not be unprecedented, a 10 – 14 % probability.

Here is how this could play out.

A brief 5 – 6 day dollar rally could ensue, where the dollar tests the 80 level.
That would be enough to push equities and commodities lower. Possibly setting up a panic selling scenario and see equities breach the March 6 th low.

Then the dollar reverses at the 5 month declining trend line and stocks and commodities take center stage.