Bottom near (but could be temporary)

February 19, 2016 11:00 AM

The Cycle Projection Oscillator (CPO) is a technical tool that uses complex algorithms to filter multiple cycles from historical data, combines them and gives a graphical representation of their productive behavior. The CPO methodology employs proprietary statistical techniques to obtain cyclical information from price data. Other proprietary frequency domain techniques are then employed to obtain the cycles embedded in the price. 

In the CPO charts, the green line represents the detrended market price and the red line indicates the CPO projection (the bar charts shown above the CPO show the market’s trading in real-time). 

Several articles have highlighted the CPO’s ability to find market turning points. The blue lines above and below the projection line represent a two-sigma move and indicate overbought and oversold territory.

SPX

The last time we looked at the S&P 500, the CPO indicated that it would be on an uptrend in the beginning of the year. That did not happen, thanks in large part to problems in China (see “Big bubble in brittle China,” page 37). Right now the CPO is showing that the SPX is vastly oversold and due for a rebound. However, it is not indicating a strong rebound and shows that the market could turn down again in the second quarter of 2016. 

Nasdaq Composite 

Like the S&P 500, the CPO is showing the Nasdaq Composite Index highly oversold. There does appear to be much more upside in the Nasdaq in February and March. Its predicted rebound would be sharper and last a bit longer than what the CPO is showing for the S&P 500, but like with the S&P it is showing weakness that could test the current downtrend as we move into the summer months and third quarter of 2016. 

U.S. Dollar

The U.S. Dollar Index resumed its bullish bias in early December and the CPO is expecting that to continue through February. The dollar appears to top in late February/ early March, which is likely to correspond with a rebound in equities and reduction in volatility. Safe haven buying will likely continue until China appears more stable and equities have found at least a temporary bottom. 

About the Author

John Rawlins is a former member of the CBOT with more than 30 years of experience in trading and research. He co-developed the Cycle Projection Oscillator, which has been featured in Futures and numerous research reports, with an aerospace engineer to identify the dominant cycles in a data stream and project them into the future. Reach John at johnrawlins@msn.com. @cpopro1. You can reach John at johnrawlins@msn.com.