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Abnormal Cycles
January 6, 2013

This weekend's report details a slightly different twist on cycle interpretations than the framework covered in recent posts. A number of cycles are forming with abnormal counts, and because of these exceptions, we must keep an open mind regarding interpretations. Beginning with the dollar, I'd like to revisit a chart posted earlier in the week which details a dollar cycle abnormality from exactly two years ago:

DX Daily 2011

Two years later, as 2012 rolls into 2013, the dollar appears to be emulating that performance:

DX Daily

Will the DX continue its intermediate decline in the same manner as 2011? A critical difference exists between the current daily DX cycle and the one that formed at the beginning of 2011: the 2011 cycle formed with a Day 6 peak... within the norm for left-translated dollar cycles... whereas the current cycle already sports a Day 10 peak. Daily dollar cycles usually don't fail once the peak has been pushed beyond Day 8.

Given recent abnormalities, we should avoid hastiness in assuming a new intermediate cycle has begun. If the current cycle manages to weaken into a failed state, I will consider the action an extension of the intermediate cycle decline into its normal timing band. If the current cycle forms as right-translated, we will obviously have no choice but to label a new intermediate cycle.

Either way the dollar action plays out, the aborted, 10-day cycle is wreaking havoc with our gold cycles. With Friday's break below the December low, we now have a left-translated intermediate cycle. At 23 weeks old, the cycle should also be feeling out its low, and so for the second time over the course of gold's giant basing pattern, an intermediate cycle will have formed as LT without failing.

Gold's current daily cycle should therefore complete the intermediate decline. However, a big question exists over that cycle count. Using 20-Dec as the last DCL, as our framework has been set for two weeks, means that Friday's plunge formed another failed daily cycle on Day 9. In this scenario, gold would not find its ICL for at least another two weeks. Accepting 20-Dec as a DCL comes with a big problem, however:

Gold Daily

Given gold's late intermediate cycle count along with the dollar antics and the bullish reversals seen across the PM complex on Friday, we face a strong possibility that gold's daily cycle got hyper-extended to 41 days. If the yellow metal can break the cycle downtrend in the next few days, this 41-day interpretation will be adopted into our primary framework.

I am also beginning to believe oil may not be immune to all these abnormal cycle formations. Oil's daily cycles typically run 1.5 to 2.5 months. While a rare ocassion brings a 3-month cycle, I have never observed a short daily oil cycle. We may have receive our first such count in December:

Oil Daily

Again, we have no way to definitively judge this scenario at this point. However, if oil manages to break out of its weekly triangle without forming a daily cycle decline, we will accept the short cycle. A DCL in December would also imply oil is only one month into a new daily cycle with plenty of time to run higher. Keep in mind the intermediate cycle is only 8 weeks old, so any pull-back should be brief. Crude should rally another 3-4 months before seeking its next intermediate low.

Oil Weekly

Given this safety net, I decided to repurchase half of my oil futures. I will acquire a full position once the daily cycle count clarifies.

Stocks managed a new closing high for their cyclical bull market, and it is only a matter of time before the SPX fulfills its cyclical duty of setting a higher high following a RT cycle. In other words, the September high should soon be eclipsed. Whether or not the intermediate equity cycle then forms as LT or continues to rally in a RT manner cannot be determined by cycles alone.

However, as I've postulated for months, stocks probably won't roll over until forced down by higher commodity prices. Given such an outcome, we will likely see equities rally into summer before meeting those headwinds. The action from summer of 2013 into the autumn of 2014 will then likely emulate the 2007-08 period where stocks drift lower as money flows into parabolic commodity rallies. Once the dollar's 3-year cycle bottoms in mid-2014, all assets will then be pressured lower.


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