A Valid Trend Line 8


The US stock markets have been going up inexorably for a good two years (at least). They formed what seems to be a very shallow 40-day cycle trough this week, its shallowness indicating that the bull is still going strong. And I wondered (as I have often recently) when we might expect this bull to lose steam, and when we are likely to see the peak of the current 9-year cycle.

Identifying peaks is a notoriously tricky business because of the fact that Hurst cycles have synchronized troughs, which means that their peaks are not necessarily synchronized. But a very useful tool for identifying, or confirming, a peak is the VTL (Valid Trend Line). A VTL is a standard trend line which connects peaks or troughs, and it is validated by a few simple rules defined by Hurst.

In order to confirm the peak of a particular cycle you need price to cross below a VTL based upon the cycle one shorter than the cycle you are looking to confirm the peak for.

And so in order to confirm a peak of the 9-year cycle we would need price to cross below a VTL of the 54-month cycle. The difficulty with doing this is in working out where those 54-month cycle troughs are. I could discuss that subject at great length, but rather than getting tangled up in that discussion it would be much easier to simply ask when the peak of the current 54-month cycle would be confirmed, because that peak is likely to be the peak of the current 9-year cycle as well.

The peak of the 54-month cycle would be confirmed when price crosses down below the 18-month VTL. Here is a chart showing that VTL as well as a VTL of the 40-week cycle:

Overlapping VTLs

Of course that 18-month VTL is based upon the analysis that places 18-month troughs in November 2012 and February 2014, which could also be debated, but we will have to leave that discussion for another time (it is Friday afternoon after all …).

The reason that I plotted both VTLs on that chart is because of the remarkable perfection in their overlap. Bear in mind that a VTL is drawn between two consecutive troughs of the same cycle. Those troughs for the 18-month cycle I have given above. For the 40-week cycle the two troughs are February 2014 and August 2014. What is remarkable about that overlap is that the 18-month VTL has not been drawn to touch the August 2014 trough, but that trough came down to perfectly touch the 18-month VTL. Here you can see how accurately the 18-month VTL provided support as price came down to the August trough:

A perfect touch

It is that kind of perfection in the market which emerges from a cyclic analysis that astounds me (I’ve been told I’m a bit weird).

So back to the 54-month cycle peak. If price crosses below that 18-month VTL (assuming it is the correct 18-month VTL) then we will have confirmation that the 54-month peak has formed in the market, and the current bull party will be over. That 54-month cycle peak will probably also be a 9-year cycle peak, and so we should brace ourselves for a strong bear move, stronger than any bear move since early 2009.

That 18-month VTL is at a level of 1924 today, only about 70 points below the current price. Six days of average-range downwards movement would take us to that level. By the first week of October the VTL has climbed to above 1940.

Of course the peak is not confirmed until price does cross the VTL, and as I mentioned at the top of this post, the bull still looks strong. But when the market begins to turn we will know at what point we can say that the party is over.


About David Hickson

I have been trading for over 20 years, but only had any success after discovering Hurst's cyclic principles. Unable to find any software to speed up the analysis process I created Sentient Trader software, which now pretty much does all the analysis for me. I am a film maker and a TV director, but nowadays I mostly provide consultation services to professional traders and fund managers, helping them to integrate Hurst analysis into their trading. I'm South African and live with my family in Italy.


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8 thoughts on “A Valid Trend Line

  • Jeffrey Young

    David,

    Still waiting to see the 6 year harmonic cycle. This analysis does no good if I can’t get sentient trader to adjust and pin sorter cycles. There should be some type of cycle override that allows you to pin troughs tighter together. If your presenting an analysis that Sentient trader is unable to do then why am I paying for something that is unable to give me an accurate analysis. That is extremely frustrating. Maybe you could show everyone who has bought the software how to program an expert model with shorter cycles than the 54 month like a 48 month cycle which William Randall was talking about. I just want to know the procedure for asking my own models. Every time I try it never works out or I am not undertaking how to do it. I love the software but I am frustrated by this situation. Help please

    • David Hickson Post author

      Hi Jeffrey. I’m not posting an analysis that Sentient Trader is unable to do, those charts are generated in Sentient Trader! It is very possible to create nominal models with shorter cycles in Sentient Trader. There is a video all about creating custom nominal models here (or as part of the FLD Trading Strategy course). Remember that you can always get help with using Sentient Trader by emailing our support team.

    • William Randall

      Hi Jeffrey.

      David is correct in that it is very easy to create custom nominal models in ST. I’ve done it myself. I have put forth the position that a top-down nominal model in ST should be based on 44-45 months instead of the default 54 months. ST is no different than any other algorithmic software, the output is totally dependent on the input (i.e. the nominal model and the data cutoff). If the nominal model used as the input is inaccurate, then the output will be inaccurate. That begs the question “what is accurate?” I determine the validity of a model by backtesting and comparing the trade metrics of the various models.

      ST has a few undocumented capabilities I discovered that make it very flexible. I have to leave that discussion to David! I have not seen any other complete software package that implements Hurst’s cycle methodology as beautifully as ST. I hope this helps.

    • Derek Frazier

      Jeffrey
      Speaking as a long time ST user, ST can be helpful for you when you get it going how you want. It is a bit slow, and can be hard to get it going. It is still much better than pen and paper for me. I agree that it should be updated further if possible. To override the analysis you can use an expert model. If that doesnt work, you will have to trial and error an expert model that ST will allow you to place your troughs where you want. Perfection will not be possible. I just try to get it to where I can quickly make trading decisions on all of my instruments. I could always use more speed with software, lol.

      • David Hickson Post author

        Hi Derek. We could all do with more speed! I have been thinking of writing a series of posts about getting the most out of Sentient Trader … for instance I run 29 workspaces on intraday forex instruments, down to the 15-minute chart level (that’s 116 charts), and it runs very smoothly (on a 4GB RAM computer, Windows 7, basic DELL, not very fancy at all). Let me know if you think posts along those lines would be useful.

  • SilentOne

    I second that William.

    David, I was wondering if you have considered the fact that the 4 year Presidential Cycle is coming into play shortly. The axiom is that you basically buy late in the 3rd quarter of the second year of the Presidential term for what is historically a bullish phase into the 4th year. Hard to imagine this working this time around with larger cycles getting very right translated and a 9 year low due before late 2016. The 4 cycle Presidential Cycle failed miserably in 2007/2008. So with a 40 week low forming here for the US markets, I wonder if this becomes a factor. Just another factor layering on top of QE to infinity, ZIRP etc. TWT.

    cheers,

    john

      • Derek Frazier

        Hi all, sp500 is not an easy trade, however russell appears to be the one with follow through. John brings up a good point, fundamentals seem to drive the market more and more, case in point: David’s two posts about Euro 25 month cycle and the extremely condensed 40 week cycle in US equities. It has been a chore trading sime instruments, thankfully Euro, GBP, oil provided some easier trades this summer. Thanks.