Cycle Trading

Stocks printed a new daily daily cycle high on Tuesday. However, there are some bearish divergences that are developing that we will take a look at.

The bearish divergences that are developing on the momentum oscillators are often associated with a cycle decline.

There is also a bearish divergence that has been developing on the Advance-Decline line which which often heralds a daily cycle decline.

What this means is that we need to re-look at the decline into the day 45 low. While the day 45 low was in the timing band for a DCL, it did not satisfy other criteria that we look for in a daily cycle low such as:
* Causing the 10 day MA to turn lower
* A bearish TSI Zero Line Crossover
* A fib tracement of at least 38%

That leaves us with a couple of scenario’s to consider:
1) Day 45 did not host the DCL
Under this scenario, that places stocks very deep into their timing band for a daily cycle low. Therefore any daily cycle decline at this point would likely to be brief.

2) The second scenario is if, in fact, day 45 was the DCL. That would make Tuesday day 9 of a new daily cycle. In either scenario, a close below the upper daily cycle band would signal that the daily cycle is in decline. But under the second scenario with stocks being at only day 9, that leaves 4 – 6 weeks before stocks would be in their timing band for a daily cycle low.

In either scenario, selling on a close below the upper daily cycle band would limit the downside risk. Long positions can be re-entered if the decline did not close below the lower daily cycle band and stocks closed back above the 10 day MA.

But if stocks close below the lower daily cycle band, then this is not the time to throw caution to the wind …