Erik McCurdy's  Instablog

Most stock market short-term cycles follow a well-defined, "normal" development path. For example, the cycle from late December until early March had an extremely bullish translation, resulting in extended rallies followed by brief, shallow declines. The next cycle from early March until mid-May had a bullish alpha phase followed by a bearish beta phase, signaling a normal transition from right to left translation.

 

 

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However, the current cycle that began in May has exhibited very unusual price behavior as short-term market volatility has increased. The early formation of the alpha high (AH) after only six sessions was a bearish development that favored a continuation of left translation and forecast two to three weeks of additional weakness during the alpha phase decline. After an initial sharp decline last week, stocks have rebounded violently, approaching the AH. Given the confirmed formation of the last short-term cycle low (STCL) on May 18, and assuming that the alpha phase is still in progress, there are now two equally viable short-term scenarios. The first scenario continues to assume that the AH occurred on May 29, in which case the alpha phase decline is still in progress.

 

 

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The second scenario assumes that the alpha phase rally is still in progress. This would be a highly unusual scenario, because prices have moved below the last STCL during the alpha phase rally, although it is always important to remember that the focus of cycle analysis is time, not price. This type of market behavior is not "normal," but it will sometimes occur during periods of heightened market volatility. This scenario is supported by both price oscillators, which have been trending higher since the formation of the STCL in May. In this case, the AH would be expected to form sometime during the next several sessions, after which a relatively brief alpha phase decline would develop.

 

 

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Both scenarios should follow similar development paths for the next two weeks, so it is likely that renewed clarity with respect to the primary short-term scenario will not reemerge until the beta phase is in progress. In either case, price behavior should continue to be characterized by violent moves in both directions for the remainder of the current cycle. We will identify the key developments as they occur in our daily market forecasts and signal notifications available to subscribers. Try our service for free.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.