Price has flattened out but is struggling at the August swing low support identified this morning. Probabilities are that the 80-day cycle trough should launch in this time zone. If not today, certainly by mid-week. However, I want to remind you that our peg of July 19th for the 18-month cycle trough is still tentative and has implications for our current analysis. I am particularly bothered by the potential trend change indicated by the price action this morning, especially if the market continues to move lower.
Placement of the 18-month cycle low is important because the associated dip/correction tends to be the deepest we experience over the larger, 54-month cycle. A trip to the 200-day moving average and sometimes lower is typically in the cards. Today, the 200-day moving average sits around 4100 on the S&P 500 24-hr continuous futures contract. The unadjusted algorithm still places the projected 18-month cycle low towards the end of the year.
The 18-month cycle dip on the S&P 500 index (tentatively marked at 4215.25 on the S&P 500 24-Hour continuous futures contract and 4233 on the cash index) on July 19th was barely discernable in the index alone compared to the typical, expected magnitude. There is precedence for this milder-than-normal dip, such as we saw in 2017. And we tried to justify the mild dip as attributable to sector rotation. Also, the dip would be milder than normal coming out of an important low like March 2020. But we would expect the ensuing rally from the dip to be commensurately strong. This latter point is what has me a bit contemplative here.
We now have more price action since July to interpret and guide us on the S&P 500, our main market proxy. Also, I have been monitoring the behavior of foreign markets – such as the FTSE 100 in London. And I am watching other indexes here at home, such as the Dow Industrials.
One concern I have is that the rallies from the July 19th low are somewhat anemic for the typical first run out of an 18-month cycle trough. Also, unless the price reverses higher almost immediately, we are violating the 80-day cycle FLD (future line of demarcation) today, which would be an infrequent event on the first 80-day trough out of an 18-month cycle low.
If we close below the FLD, you can often expect another down leg equal to the distance just traveled from the all-time high. That would be another 200 S&P 500 points taking us to a potential low of 4150, which would somewhat coincide with the June low around 4120 or so. In the old days, this decline would come swiftly were it to occur here, in a spike waterfall decline. I am speculating somewhat, but it is vital to keep these possibilities in mind and respect the risk at hand.
This post-July anemic behavior could mean that the 18-month cycle low is still in front of us. Longer cycles have more expansive variation windows for bottoming, so they are harder to nail as to specific dates other than a range. We would know for sure that the 18-month cycle is still in play if the S&P 500 index low at 4224 on the continuous futures contract fails to hold in a further decline. Without such confirmation, placement of the cycle trough remains an open question for now.
We must keep this information in mind on this dip as it will influence how we interpret price action between now and the end of November when the next intermediate trough comes due on the 20-week cycle.
Recency bias would have us buy the dips, but this is a situation where you might buy the dip, get some immediate gratification, and then watch the market roll right over the top of you. It can be challenging if the price action rolls over hard overnight and before you wake up in the morning.
At this juncture, the tactics are the same whether the 18-month cycle is in front of us or behind. We should expect the 80-day cycle to bottom in this time zone – and the price will trough either way. It is how we handle the rally from that trough that requires potentially different tactics.
I will keep you posted on how the Founders Group handles the issue as we begin to deploy our cash again.
A.F. Thornton