Cycle Trading

I want to discuss the Euro but to do so I want to frame it with the background of the dollar. The USD Index measures the performance of the US Dollar against a basket of currencies:

Euro (EUR)
Yen (JPY)
Pound (GBP)
Canadian dollar (CAD)
Krona (SEK)
Franc (CHF)
Of the 6 the Euro is weighted at 57.6% so consequently the Euro/USD tends to have an inverse relation.

Let’s begin by looking at over 40 years on the dollar chart.

What we notice immediately the peaks in 1985 and 2002.

Upon closer examination, we see that the dollar has definable cycles.
The biggest cycle is what I term the 15 year super cycle.

Each super cycle is defined by a 15 year low on either side along with a cycle peak.
The 15 year lows are the lowest points in the 15 year cycle.

Embedded with in each 15 year super cycle are 5 three year cycles.

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In both super cycles the first two 3 year cycles and at least part of the third 3 year cycle were very bullish as the super cycle rallied into its 15 year cycle peak.

The first 15 year super cycle peaked after 74 months and sold off for 92 months.
The Second 15 year super cycle peaked after 104 months and sold off for 86 months.

Please notice below that the embedded three year cycles formed higher highs and higher lows until the 15 year cycle peak.
Then the embedded three year cycles formed lower highs and lower lows into the 15 year cycle low.

Now let’s turn our attention to the Euro

Again we notice some major peaks and lows.

And just like the dollar, the Euro can be defined by a 15 year super cycle …

… which is can be further be subdivided into five – 3 year cycles

And if you divide the 188 month super cycle by the embedded five cycles you find that they average 37.6 months — a three year cycle.

So on to the current super cycle.

We can see that the Euro’s 15 year super cycle peaked in the second 3 year cycle and is in decline. The Euro is on month 9 of the fifth 3 year cycle of the current 15 year super cycle. It is worth noting that while the first 3 year cycle ran 61 months, the average of the first four 3 year cycles is 35.25 months.

You will notice on both dollar super cycles and the previous Euro super cycle that once the super cycle peaks, the remaining 3 year cycles are characterized by lower three year cycle highs and lower three year cycle lows.

That is not happening with the current Euro super cycle.

Instead of printing lower lows to accompany the lower highs, the Euro appears to be in a multi year triangle consolidation.

Now I want to jump back to the dollar here. The dollar just printed a failed daily cycle. The failed daily cycle is significant because it heralds an intermediate cycle decline.

The weekly cycle peaked on week 9 and formed a swing high last week, week 10. The remaining daily cycles should now form as left translated cycles until the intermediate cycle low. With a timing band of 18 – 22 weeks we should see at least one more failed daily cycle after the current one prints a daily cycle low.

This is the second intermediate cycle of the current yearly cycle. Yearly cycles are typically comprised of two intermediate cycles. This suggests that not only are we expecting that an intermediate cycle decline has begun, but an yearly cycle decline as well.

So this is month 7 of the current yearly cycle. With an intermediate timing band of 18 – 22 weeks, that leaves 8 to 12 weeks for the dollar to find its weekly low. Which is 2 to 3 months. That would bring the yearly cycle out to months 9 or 10, which is right in the timing band for a yearly cycle low. Of 33 yearly yearly cycles that I have studied between 1978 and 2012 about 70 % print a low between months 8 & 14. And 45% of the yearly cycles studied printed a yearly low between months 8 & 11.

That will bring the the three year cycle out to month 25 or 26, which is too early for a three year low. The chances are that we will then see a left translated yearly cycle unfold leading into a three year low in 2014.

As we noted above, the Euro is in month 9 of the fifth — 3 year cycle. The fifth 3 year cycle is the final 3 year cycle of the 15 year super cycle. Final 3 year cycles are typically left translated cycles that plunge into a 15 year super cycle low. Instead this fifth 3 year cycle for the Euro appears to be in a consolidation pattern. Here is a possible scenario to consider …

The dollar is poised to travel down into its yearly cycle low. The move lower by the dollar will likely result with the Euro testing the upper triangle stem (a). As the dollar emerges from its yearly cycle low that will send the Euro lower (b), maybe to the bottom stem. I believe that the next yearly cycle for the dollar to be a left translated yearly cycle that will end in a three year cycle low. That plunge into a three year low could result with the Euro resolving its multi-year consolidation with a bullish break out.

A bullish breakout from the multi-year consolidation may shorten the final three year Euro cycle and actually begin a new three year cycle of a new 15 year super cycle. And the first 3 year cycles of new super cycles tend to be very bullish. Which will tip the Euro/Dollar in favor of the Euro …