As the indices continue their relentless ascent to new highs, the inevitable question one is beginning to hear of course is “Where is the top?” From the study of cycles as promulgated by Hurst, one is aware that, due to the complex nature of dominant wave interactions and their underlying trends, it is a bit more difficult to accurately forecast major market highs than lows. This difficulty stems from the translation effects of the various dominant waves at highs. However it is relatively easy to reduce the “topping window” to a fairly narrow range.
The chart below is the S&P 500 showing the 20 week price wave extracted with Hurst’s bandpass filter over the last eight years. The average period of the wave was larger in 2008 and 2009 than it is today due to the gargantuan amplitude back then! There were 12 oscillations of the 20 week wave from the 2007 high to the 2011 high, which ostensibly are 4 year cycle highs according to filter analysis. The index is completing the 12th oscillation of the 20 week wave since the 2011 high. That occurrence, in and of itself, is clearly insufficient to start piling in short. Additional information and evidence of a top is required. All of the longer waves (4 year, 80 week, 40 week) are either at or approaching cyclical highs. That implies from a probabilistic viewpoint that the index has entered the leading edge of the “topping window.”
An analysis of the shorter dominant price waves is necessary for a more timely determination of a major market high. The chart below is a daily chart of the S&P 500 showing the 80 day price wave from the most recent 4 year low in November 2012. Also shown are several months of the 20 day price wave. The 80 day price wave has been very dominant over the last 18 months. Until just recently, the amplitude of the 80 day price wave was greater than the amplitude of the 20 week price wave! The highlighted area shows that the amplitude of the 80 day wave has been greatly reduced, almost to zero! This will cause a duration fluctuation of the 80 day wave resulting in a much shorter than average cycle. However the amplitude of the 20 day wave is very robust which will make identifying the 80 day cyclical low less problematic.
One of the more reliable indications that a major cyclical high or low is in place is the formation of a non-failure swing of a shorter dominant price wave. This is clearly evident at the 2007 and 2011 highs and the 2009 low with respect to the 20 week wave. There are many other historical examples. The 80 day wave has not formed a non-failure swing since the prior 4 year cyclical low. A formation of one within the “topping window” will indicate a high probability that a major market high is in place. For the more aggressive types, a non-failure swing of the 20 day wave after the next 80 day wave high will be an earlier indication of a market top.
William
4 thoughts on “20 Week High”
Very nice work. Thanks for sharing. Are you thinking that this past Thursday was a likely candidate for the 20 day and 80 day low? It would appear so if I am reading your band pass filters correctly. What do you mean by “a non-failure swing” of the 20 day wave after the next 80 day wave high? Could you please explain that a little more? Thanks.
Doc
Hi Doc,
Thanks for the continued interest in my work.
Last week’s low was definitely a 20 day low and most likely an 80 day low also according to my filter analysis. It phases very nicely on the Russell 2000 (my trading vehicle of choice). It will take a few more days to confirm the 80 day low. Friday’s higher low and today’s break above Thursday’s high (DOW hit new highs) confirms the 20 day phasing though ideally a close above Friday’s high would be a stronger indication..
You are probably already familiar with a “non-failure swing” (NFS) but just do not realize it. A NFS is a classic textbook technical pattern indicating a potential change of trend. It also applies to cyclical analysis. An idealized NFS at a longer term high consists of a cyclical low (e.g. 20 day price wave) followed by two higher cyclical lows and two higher cyclical highs. These will be followed by a VTL break, a lower cyclical low, and a lower cyclical high. Further confirmation is provided by a second lower high. The inverse of the above is applicable to a longer term low. There is also a variation called a “failure swing”. If you Google it you will find illustrations which should clarify the above description.
William
Thanks for the kind reply. Yes I am quite familiar with the non-failure swing. I just didn’t know what by that name.
Quite an interesting week we just had. Lower lows on all the non-large-cap indices, RUT especially. Question is was this a failure of the 20day low for the RUT and MID or just a late 20day low?
Also as part of a topping pattern we might expect some left translated cycles to emerge and predominate. A failure swing if you will.
All the best,
Doc
Hi Doc,
Last week was interesting. In addition to the modulation that’s wreaking havoc on the intermediate price waves, the 10 week wave in particular, the fundamental interaction of the airline downing also skewed the short term price waves! Fortunately the spectral signature of the Russell and the S&P is virtually identical from the 20 day price wave down to the 3 hour wave. It will take a couple of trading days for the picture to become clearer. I’m looking for a 20 day wave low to form sometime this week.
William