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Cycle Analysis on S&P 500 Says Buy Weakness


Right now, cycle work suggests buying weakness if we see a meaningful correction and, until otherwise designated, holding on to current equity positions.

Right now my cycle work is indicating to buy weakness. Here's how I've arrived at this conclusion: I've taken the daily chart of the cash S&P 500 for the past year and overlaid three trading cycle lengths: 20-22 trading days, 14/15 trading weeks, and 16/17 trading weeks.

During the past two years (Feb/Mar 2009 through present), I have found that when a 20-22-day cycle bottoms in the same time frame as the 14/15 week cycle, the confluence ignites a very powerful advance. I have designated the most recent examples of the cycle confluence using side-by-side light green (day) and dark green (week) vertical lines.

The most recent "dual bottoming" occurred at the end of November. Since then, the cash SPX has climbed from 1171/73 to Tuesday's high at 1235.05, or nearly 5.5%, which appears to be the start of a new dual cycle upleg. The next dual cycle bottoming time frame is due during the final week of February into the first week of March.

While Tuesday's intraday action -- a 12-point up move from 1223.12 to a new high at 1235.05, followed by a 12-point giveback -- suggests that a near-term price peak likely has been established, the underlying cycle environment argues strongly that any follow-through weakness into the 1205-1195 area (in the case of a relatively deep correction) will be considered a buying opportunity ahead of another up leg.

Yes, cycle analysis definitely is a bit esoteric and sometimes totally unreliable. However, I use it like any other tool, oscillator, or indicator: I watch to see the message it might be trying to communicate. Right now, the cycle work is telling me to buy weakness if we see a meaningful correction and, until otherwise designated, to hold on to my current equity positions.

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