Cycle Trading

The daily equity cycle peaked on day 21. A swing high formed on day 22 and a break of the daily cycle trend line on day 23, which signals a daily cycle decline. Day 25 saw a bearish zero line break of the True Strength Indicator, which is another signal that is usually present during a daily cycle decline.

Friday, day 26, was the lowest point since the day 21 peak. Monday formed a swing low and we are now faced with the possibility that stocks printed an early 26 day daily cycle low.

Historically speaking, about 20% of daily equity cycles print a shortened low between 24 & 30 days. And since October, 2011 there have been 17 daily cycles. Five of those daily cycles (29.4 %) printed a low between 24 and 29 days.

So Monday could possibly be day 1 of a new daily cycle. A break of the declining trend line does signal a new daily cycle. A break to new highs will confirm a new daily cycle.

Meanwhile I am seeing some concerning things developing with gold.

Gold printed a bearish reversal today. Even though gold printed a new higher daily cycle high gold did close lower today. Why that concerns me is that there is also a bearish divergence developing on the True Strength Indicator. As gold makes new daily highs, I like to see the TSI do the same. A bearish TSI crossover could signal a daily cycle decline. A swing high accompanied by an accelerated trend line break would further confirm a daily cycle decline.

However, until gold forms a swing high a delivers an accelerated trend line break, it hasn’t. A panic drop by the dollar into a daily cycle low could still send gold higher.

The current dollar cycle peaked on day 6 and has since been in decline. Thursday, day 16 was the lowest point since the day 6 peak. Friday and Monday saw the dollar print higher lows, forming a mini triangle. An intermediate low for the dollar is normally characterized by a final 2 – 4 day plunge into an intermediate low. And that has not happened yet. So I am still expecting one more push lower by the dollar and that can lift gold into more push higher.

Of course, the dollar may not cooperate. A break above 79.69 forms a swing low and a break above the declining trend line confirms a new daily cycle. And if the dollar confirms a new daily cycle, then I would expect gold to accelerate into a daily cycle decline.