CAC40 Index Analysis
History of the Paris CAC 40 Index and Trading Instruments.
Since it’s the first time I present the Paris CAC 40 analysis on my website, I would like to introduce first, little bit history of the Paris CAC 40 index, and which instruments are available to trade this index.
This article dig into the history of the CAC 40 Index and explores various trading instruments available for investors looking to capitalize on movements in this index.
The CAC 40 Index, short for “Cotation Assistée en Continu,” is a benchmark French stock market index that represents the 40 largest publicly traded companies on the Euronext Paris.
The CAC 40 was launched on December 31, 1987, with a base value of 1,000 points. It was developed by the Paris Bourse, which later became part of Euronext following its merger with the Amsterdam Stock Exchange in 2000.
The index was created to provide a comprehensive view of the French stock market.
The CAC 40 is a key indicator of the French economy and is widely followed by investors both domestically and abroad.
Trading Instruments for the CAC 40
For investors interested in trading the CAC 40 Index, various instruments are available. Each comes with its own advantages and considerations. Here are some popular options:
Futures Contracts
Futures contracts are standardized agreements to buy or sell a specific asset at a predetermined price on a specified future date. The CAC 40 futures contracts are traded on Euronext Paris and allow investors to speculate on the future value of the index.
Advantages:
– Leverage: Futures contracts often allow for significant leverage, enabling traders to control larger positions with a smaller amount of capital.
– Liquidity: The CAC 40 futures market is typically liquid, making it easier to enter and exit trades.
– Hedging: Futures can be used to hedge against potential losses in a portfolio.
Considerations:
– Complexity: Futures trading can be complex and may require a deeper understanding of market dynamics.
– Margin Requirements: Traders must maintain a margin, which can lead to additional costs and risks.
Exchange-Traded Funds (ETFs)
ETFs that track the CAC 40 Index are another popular trading instrument. These funds allow investors to gain exposure to the index without having to buy individual stocks.
Advantages:
– Diversification: ETFs provide instant diversification by holding a basket of the index’s constituent stocks.
– Liquidity and Flexibility: ETFs can be traded like stocks on the exchange, providing flexibility in trading.
– Lower Costs: Generally, ETFs have lower expense ratios compared to mutual funds.
Considerations:
– Tracking Error: Some ETFs may not perfectly track the index due to management fees and other factors.
– Market Risk: Like any equity investment, ETFs are subject to market risks.
Contracts for Difference (CFDs)
CFDs are derivative instruments that allow traders to speculate on price movements without owning the underlying asset.
They are available for the CAC 40 Index and can be traded through various brokerage platforms.
Advantages:
– Flexibility: CFDs allow for both long and short positions, enabling traders to profit from rising and falling markets.
– Leverage: Like futures, CFDs can be traded on margin, allowing for greater exposure with less capital.
Consideration
– Risk of Loss: The use of leverage can amplify losses as well as gains.
– Brokerage Fees: CFDs often come with spreads and fees, which can impact profitability.
Options
Options provide the right, but not the obligation, to buy or sell the index at a predetermined price before a specific date.
Options on the CAC 40 Index can be employed for hedging or speculative purposes.
Advantages:
– Flexibility: Options offer various strategies for traders, including hedging against declines or leveraging bullish outlooks.
– Defined Risk: Buyers of options have limited risk to the premium paid for the option.
Considerations:
– Complexity: Options trading can be complex and requires a solid understanding of various strategies and risks.
– Time Decay: Options lose value over time, which can impact profitability.
Analyzing Long-Term Market Cycles: From 9 Years to 40 Days.
In this analysis, we will explore long-term market cycles, focusing on the significant shifts since the pandemic low in March 2020, including three notable 18-month cycles.
Understanding the Pandemic Low and Market Cycles
The March 2020 low, known as the pandemic low, marks the beginning of a 4.5-year cycle that may also represent a 9-year cycle.
There is ongoing debate regarding the placement of the 9-year cycle, particularly whether it started in December 2018 or March 2020. Regardless, it is crucial to remember that the March 2020 low of 3632.06 signifies at least an 18-month cycle.
If we consider the December 2018 low as the 9-year low, we need to ask: why is the March 2020 low lower than the December low? The answer lies in the impact of the COVID-19 pandemic, which distorted typical cycle formations, amplifying market movements.
Scenarios and Implications for Future Cycles
Scenario One: December 2018 as the 9-Year Low
If we accept that December 2018 is the 4.5-year and 9-year cycle low, the next 4.5-year cycle will occur around September 2022, where the CAC 40 reached a significant low at 5628.42. Following this, we can expect another cycle low between October and November 2026.
Scenario Two: March 2020 as the 9-Year Low
If we consider the March 2020 low as the last 9-year low, the next 4.5-year cycle is anticipated between December 2023 and January 2024. The CAC 40 experienced a low in October 2023, indicating a potential cycle length of 46 months, closely aligning with the average of 51 months for the CAC 40.
Within scenario the next 4.5 years or 54 months cycle is due around August 2027.
Cycle Line Crossings and Market Signals
As discussed in previous articles, when the market crosses its cycle line or FLD, it confirms the conclusion of a cycle. For a valid signal, the median price line must cross the FLD rather than just touching it, to avoid false signals during market distortions like the COVID-19 decline.
On the above chart, the blue line represent the CAC40 price, the green line the 4.5 years fld and the orange one the 9 years fld.
In March 2020, the CAC 40 found support on its 9-year FLD, reinforcing the notion that this low may indeed be the significant 9-year low.
From the 2011 major low, the CAC40 crossed above 4.5 years cycle line at 4011 in September 2013, indicating an upward target of 5557, with a peak of 6111.41 reached in January 2020.
At the time of the first 4.5 years low formation after a first major low, the market should find support on his cycle line, that’s what happen in 2016.
At the second 4.5 years low formation in this case the 9 years low, the market should cross below his 4.5 years cycle line (FLD) and provide a downside target.
On February 2020, the Paris CAC 40 crossed below his cycle line the second red circle, at 5420 and provide a downside target at 4729. .
On March 16 2020 the Paris CAC 40 made a low at 3632.06 meeting and exceed his target.
Future Expectations for the Paris CAC 40
Assuming March 2020 marks the 9-year low, we can expect the next major low in January 2028, while the most recent major low in 2023 is recognized as part of an 18-month cycle.
According to J.M. Hurst’s cycle theory, we have sufficient tools to successfully trade these shorter time cycles.
Keep in mind if the 2018 low is the last 9 years low then the next 9 years cycle should be around 2027.
During the next 9 years cycle low formation, the Paris CAC 40 should cross below his 9 years FLD line (the orange line) providing a downside target.
Since we do not trade the market long term, knowing if the 9 years cycle low is on December 2018 or March 2020, is not the most important but it provides insight into the long-term trend for investors.
Let’s start our analysis by the 18 months cycle.
The Upcoming 18-Month Cycle
The last low occurred on October 23 at 6773.82, with the next significant expected low between February and March 2025, the blue vertical dashed line.
The green semi circles at the bottom of the chart, represent the 9 years cycle.
Market Peak Predictions
Although the anticipated peak was initially projected for June or July 2024, we can analyze the CAC40 to gain further insights. The Paris index has already experienced a peak on the left side of this cycle.
Until the French market achieves a higher high than the May 2024 peak, we can confidently designate the May high as the definitive peak of this 18-month cycle. If this scenario plays out, it may not bode well for bullish market conditions in the latter part of the cycle.
Anticipating the Next Low
The next low is expected around March 2025, as indicated by the blue vertical dashed line on our chart. At this stage, technical analysis suggests that the French market should dip below its 18-month cycle line (FLD), represented by the green line.
Currently, the CAC40 index is trading close to this line. For October 2024, the cycle line stands at 7,492.03. Should the CAC40 index drop below this threshold in the coming months, we could see a potential downside target of 6,724.8, indicating a 10% decline.
Long-Term Cycle Considerations
Assuming the last 9-year cycle began in March 2020, the semi-circle representing this cycle is illustrated at the bottom of the chart. If May 2024 marks the peak of the 9-year cycle, we might expect a less bullish to neutral trend in the latter part of this cycle, as the peak aligns with the overall cycle.
The 40-Week Cycle in the Paris CAC40 Index
as we enter the second 40 week cycle following the October 2023 low, it’s important to note that this cycle appears less bullish compared to the first one.
The previous 40-week cycle low occurred on August 5, at a level of 7,029.91, aligning with the downside target set during the week of June 10, when the CAC40 dipped below its cycle line at 7,687.30, indicating a potential target of 7,115.51—a decline of 572 points, or 7.44% in potential profits.
Since reaching this low, the market has rallied, encountering resistance at its cycle line, depicted as a blue line on the chart. Currently, the CAC40 struggles to break above this resistance, possibly due to pressure from longer cycles.
Looking ahead, we anticipate the next 40-week cycle low to form by the end of March 2025, marked by a blue vertical dashed line. The upcoming cycle lines and their potential targets are outlined for the next four weeks, in case the Paris CAC40 crosses above its cycle line.
For a valid trading signal, remember that the median price must cross above the cycle line, not just a part of the bar chart, specifically the weekly high.
At the bottom of the chart, the blue sine waves represent the 40-week cycle.
If the peak of 7,804 on September 23 is indeed the cycle peak, and considering that the peak for this cycle was anticipated around mid-December, a decline may follow, as the peak occurred on the left side of the cycle.
However, confirmation is essential. We must closely watch the CAC40’s interaction with its cycle line. A crossover above this line may indicate a higher peak than the September high.
Since the start of the year, we have two signals, both were profitable: one in December 2023 and another in June 2024, both boasting a 100% success rate.
Just below there is the potential targets for the CAC40, for the next 4 weeks, in case the market will cross above his cycle lines.
The 20-Week Cycle in the CAC40
Since the significant low in October 2023, the CAC40 index has generated three trading signals based on the 20-week cycle.
First Trading Signal
The first signal occurred during the week of November 27, when the CAC40 crossed above its cycle line at 7,264.
This breakout provided an upside target of 7,755.
The index successfully met this target on February 12, continuing its move to reach a high of 8,259.
Second Trading Signal
The second signal emerged on the downside at 8,166, indicating a potential target of 8,073.
The market subsequently experienced a sharp decline, meeting and exceeding the downside target, largely influenced by the 40-week cycle expected to form a low in July.
Third Trading Signal
The third trading signal occurred in the week of September 23, when the CAC40 crossed above its cycle line at 7,543, targeting 8,057 a potential profit of 514 points or 6.81%. However, following this crossover, the CAC40 has declined and was trading around its cycle line last week.
Cycle Analysis
If the 7,804 high represents the peak of the 20-week cycle, and given that the peak occurred in the left part of the cycle (left time translation), we can anticipate a continuation of the decline.
At this stage, the CAC40 should ideally cross below its cycle line, leading to a downside target.
Future Outlook
Looking ahead, the next 20-week cycle is projected for November 25,
and the CAC40 should cross below its cycle line.
After forming the 20-week cycle low, the CAC40 is expected to rebound, using its cycle line as resistance before resuming its downtrend towards March 2025, when the next 40-week and 18-month cycles are anticipated.
Just below there is the potential targets for the CAC40, for the next 4 weeks, in case the market will cross below his cycle lines.
The 80 Days Cycle in the CAC40.
The 80 days cycle analysis begins with the significant low on August 5, which led to a subsequent low formed on October 16.
This cycle lasted 72 days, exceeding the typical 80 days duration as outlined in the Hurst nominal model by only 4 days.
On October 16, the CAC40 index found crucial support on its cycle line, aligning perfectly with expectations for the initial 80 days cycle following a major low.
During this cycle, the CAC40 experienced two false signals, indicated by slight crossings above its cycle line.
Upcoming 80 Days Low.
The next 80 days low is anticipated by the end of the year, marked by the purple vertical dashed line.
During this upcoming low, the market is expected to cross below its cycle line, suggesting a potential downside target.
The peak from the previous 80 days cycle occurred on the right side of the cycle, so we anticipate the next peak to form on the left side. If the market fails to exceed the September 27 high, the 7,804 high will be crucial for calculating the next downside target when the CAC40 crosses below its cycle line.
Monitoring Market Signals.
It’s essential to monitor where the next 80 days peak will form, as this will provide insights into the potential bearish sentiment in the market.
From August 5 low to the October 16 low, I have drawn the 80 days cycle trend line (VTL).
A cross below this line will confirm the 80 days peak and, more importantly, the 20 weeks peak.
The target of 8,171, triggered on August 29, remains valid until the CAC40 crosses sharply below its cycle line.
The 40 Days Cycle Analysis.
On August 23, the CAC40 crossed above its cycle line at 7,520, indicating an upside potential target of 7,971, which represents a potential profit of 451 points or 6%.
However, on September 9, the CAC40 invalidated this target by crossing back below its cycle line before reaching the target.
Why Did This Happen?
Is the trading technique no longer effective?
No, this situation is often due to significant downside pressure from longer cycles, indicating that there is bearish sentiment entering the market.
At the time of the first 40 days cycle low, we anticipated that the CAC40 would find support on its cycle line.
Instead, the market crossed below it, and most of the subsequent rally occurred below this line until September 26, when the CAC40 crossed above at 7,600, providing a target of 7,859.
The following day, the CAC40 reached a high of 7,804, just 55 points below the target, or 0.69%.
Since this high was within 1% of the target, it is considered met.
The market then initiated a correction and is now on track to form its second 40 days cycle since the August 5 low.
As expected, in this second cycle, the market crossed below its cycle line on October 16 at 7,508, establishing a downside target of 7,212.
The low for this 40 days cycle was 7,420, almost 200 points above the target.
Does This Mean the Trend is Now Bullish?
Not necessarily. There remains significant downside pressure from longer cycles. To invalidate this downside target, the market must cross back above its cycle line without hitting the downside target.
What’s Next for the 40 Days Cycle?
After the second 40 days cycle, the market is expected to cross above its cycle line, providing an upside target for the next 40 days cycle peak.
After forming this peak, the CAC40 should cross back below its cycle line on the way to the third 40 days low, anticipated around November 19 (indicated by the blue vertical dashed line).
If, during the formation of the next 40 days low, the CAC40 does not cross above its cycle line and uses it as resistance, we can expect the market to decline until March 2025.
Conclusion
In summary, the current analysis of the 18-month market cycle indicates potential volatility ahead. Investors should remain vigilant as we approach key dates and price levels.