Cycle Trading

Last week the dollar staged a brief counter trend rally where it attempted to regain the 200 MA.

The dollar breached the lower Bollinger Band on August 8th. It staged a brief counter trend rally until this past Thursday where it reversed hard off the declining trend line and once again losing the 200 MA. Friday the dollar printed a lower lower on day 12 of the daily cycle.

In real time, that is how the daily cycle appeared to unfold. However that lower Bollinger Band breach makes me want to consider a second possibility. Ofter times a lower Bollinger Band breach accompanied with a trend change marks the cycle low. A Lower Bollinger Band breach that does not initiate a trend change is usually a fake out low.

What if day 14 was not the daily cycle low? Instead, day 16 sets the declining trend line leading to day 20 being the daily cycle low. That allows for the cycle low to comfortable land in the timing band where the lower Bollinger Band breach marks the cycle low. The trade off is there is no declining trend line break to signal a new daily cycle.

Either way the trend is lower. We will keep this in mind but continue with our first scenario. The first scenario has us on our toes for a DCL sooner and can be pleasantly surprised if the cycle extends.

Stocks

The daily equity cycle peaked on day 28 and has been in decline since. Friday was day 38 and stocks printed a lower low.

The timing band for a daily cycle low stretches to day 45, so stocks could still head lower. However, the narrow range day on Friday eases the parameters for setting up a swing low. A break above 1663.60 forms a swing low. Stocks will then need to break above the declining (red) trend line to confirm a new daily cycle.

The McClellan Oscillator has already exceeded the level that marked the past 3 daily cycle lows and is approaching the level of the last 2 intermediate cycle lows. So a swing low at this point will likely mark the daily cycle low.

With the McClellan Oscillator approaching the level of the previous two intermediate cycle lows has me wondering if something more sinister is at work here. Perhaps we will see the daily cycle low stretch to the latter part of the timing band.

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