Tuesday, March 12, 2013

Why no cycle bottom?

Client question:  “I do very much appreciate, enjoy, and utilize your system and all the information that goes with it.  In the 2+ years I have been reading MSR, I don’t think there has been a cycle bottom as conspicuous as this last one has been.  The market showed so little sign of breakdown in this last week of what should have been the winding up of the hard down phase.  I thought that was noteworthy, and will be excited to hear why you think that was the case, and whether that will have an effect on the next important cycle low (maybe making it stronger due to the failure this time?).”

Answer:  The failure of the interim weekly cycle to bottom with emphasis was certainly rare, but it has happened before.  I’ve seen it happen in strong bull market moves, like the one we saw in the second half of 2006.  Basically the cycle was overpowered by a combination of loose Fed money and crowd psychology.  This can happen with the weekly cycles on occasion.  

I don’t think we can make any inferences from this, however.  Bud Kress, the namesake of the Kress cycles, had a tendency to react to cycle failures by often stating that the market would have to make up for the failure to bottom (or peak, as the case may be) by doing so before the next scheduled cycle.  I don’t agree with this.  If a market is being driven by an unusually strong force – in this case QE money – I think we have to follow the market itself for turning point clues, as we’ve been doing this year.  

To repeat my personal trading/investing philosophy: market (i.e. technical) analysis must always take precedence over the cycles. 

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