Cycle Trading

Stocks were rejected at the 7000 resistance level and closed below the 10 day moving average on Tuesday, day 10. That rejection was followed by consecutive lower closes on Wednesday and Thursday. On Thursday, stocks broke below the 50 day moving average and undercut the day 38 low. Breaking below the day 38 low forms a failed daily cycle and signals that the intermediate cycle decline is now in progress.

That said, it’s still worth keeping an open mind on whether day 38 ultimately marked the true daily cycle low. There are two factors that introduce some ambiguity. First, the 10 day moving average has remained essentially flat for the past three weeks, suggesting the daily cycle may have been stretched — placing Thursday closer to day 51 rather than day 38. Second, a slight reversal candle formed on Thursday, raising the possibility of an attempt at stabilization.

For this alternative interpretation to gain traction, stocks would need to form a clear swing low and close back above both the 50 day moving average and the 10 day moving average. Without that confirmation, the burden of proof remains firmly with the bears.

What is clear is that stocks have now formed a lower low and closed below the lower daily cycle band. Closing below the lower daily cycle band ends the daily uptrend and confirms the transition to a daily downtrend. This development provides additional confirmation that the intermediate cycle decline is underway.