Two announcements this week before I explain why peaks are overlooked:
- Our new Hurst Signals (2) service is ready for launch! A short series of tutorial videos are available which explain what it is all about. The service will be available later this week.
- The Traders World Online Expo #13 starts 27 May, and I have the honor of presenting a talk in the first week.
Back to those overlooked peaks: Hurst’s Principle of Synchronicity tells us that: “Cycle troughs are synchronized where possible, whereas peaks are not”.
And with a single sentence peaks are relegated to obscurity. Trough positions are marked on a chart, peaks are not. Hurst analysts discuss troughs with enthusiasm, and only occasionally mention peaks. The reason is this: because peaks of different cycles are not necessarily synchronized, they are notoriously complicated and often form as clustered multiple peaks as opposed to the cleaner, sharp and isolated troughs that form in stock markets – (commodities and metals I believe exhibit the opposite behavior). As a result they tend to receive less attention than troughs.
But because peaks are not always synchronized does not mean that they are never synchronized. The US markets are currently in the grip of a “dominant cycle” – a long cycle (it is difficult to know which cycle, but it is of at least 40-week magnitude) which overpowers the shorter cycles. When the power of a dominant cycle increases (as it is currently) and a market accelerates strongly into a peak, what Hurst called a pseudo-trend develops.
Hurst spoke of pseudo-trends as distortions to the usual cyclical price movement, and noted that trying to predict the time and price of the eventual peak was an almost futile exercise. He also warned that pseudo-trends are always corrected as price bounces back into its normal cyclic behavior. We are witnessing a very clear distortion of price, and a pseudo-trend would appear to be developing. I generally avoid using the term because of the negative connotations of the word “pseudo”, and it is interesting that the more distorted the price becomes, the more unacceptable becomes the use of words such as “pseudo”. But if we ignore the connotations of words, and focus purely on Hurst, there is little doubt that we are witnessing a pseudo-trend.
We are used to price dropping sharply into troughs of long-wavelength cycles, and then bouncing out of those troughs, leaving a sharp isolated trough on the chart. That plunge-bounce action is measured by Sentient Trader and used in the analysis process. Usually the plunge-bounce sequence as price moves into a peak is much less dramatic than when it moves into a trough, which corroborates the principle of synchronicity. (I still use the terms plunge-bounce, although when moving into a peak the plunge is a move upwards of course, and the bounce is a move down and away from the peak).
Occasionally however price will make a dramatic plunge-bounce action into a peak, because sometimes peaks are synchronized. According to Hurst a pseudo-trend always ends in a correction of the upwards move which is often as strong and fast, if not more so, than the upwards move. We are undoubtedly witnessing the strong upwards move (the “plunge”) into the peak, and the sharper that rise becomes the more obvious it is that we are witnessing a move into a synchronized peak. The bounce that will follow is likely to be as strong, and will of course be a move to the downside.
(With thanks to an Australian group of ST users who coined the term “plunge” many years ago!)
The ever-sharpening rise into the peak is evident in this chart. When the peak forms, prices will drop and return to their usual cyclic behavior.
The distortion of the cycle moves is even more apparent in the Nasdaq (although I am very grateful to have a long trade running in the Hurst Trading Room!)
The Euro is not in the grips of a dominant cycle or pseudo-trend, and is exhibiting good clear cycles. The 40-day cycle trough has turned more bearish than expected, and is struggling to form the anticipated trough. We have been expecting the tone of the market to turn bearish as the 18-month cycle turns down, but it looks as if it is happening faster than I imagined it would.
Gold’s cycle shapes are growing ever more bearish. The 40-week cycle peak is still ahead, due some time in June, but as I’ve been saying for a few months now, it might well be a disappointing peak.
30 Year US Bonds
Bonds are dropping well from the 40-week cycle peak of 1 May 2013. The shorter cycles have been overpowered recently by the 20-week and 40-week cycles, and there is no evidence yet that this will change, meaning that we will see strong moves of several weeks in duration, with only subtle corrections.
Crude Oil is bouncing strongly out of the trough of 18 April 2013, which is of at least 18-month magnitude (the chart shows a 54-month cycle trough there, but I am always wary of placing 54-month cycle troughs, and prefer to work on the assumption that the trough is of 18-month magnitude). Bouncing out of a long-wavelength trough we expect to see smaller cycle troughs occurring early, and it is possible that the trough that formed on Wednesday was an early 40-day cycle trough.
US Dollar Index
The US Dollar has bounced strongly out of the 80-day cycle trough, and it is possible that the 40-week cycle is rising to dominance, based on my rule-of-thumb that following a clear cycle shape – the 80-day cycle in this case, a cycle with at least four times that wavelength is dominant, although the 80-day cycle is not really very clear, and the US Dollar might have simply caught a bit of the “stock market fever”.
That’s it for this week. Have a great week ahead, and profitable trading!