I started writing Sentient Trader Outlook last year as a fun way of using the “blog” capability of our website, at the same time showcasing Sentient Trader software. The Outlook took a backseat to recent priorities of launching Hurst Signals, and the preparation of an update to Sentient Trader (which will be released next week).
It has been very rewarding and flattering to receive many emails asking us to bring ST Outlook back and so here we are again!
The very constructive feedback we’ve received has guided us to make ST Outlook a regular feature, which we will be publishing every Saturday. This first edition for 2012 will step back to take a look at the bigger picture in the S&P500 from a Hurst perspective, and we will explore other markets and more detail in the weeks to come.
Note that the data used for this analysis is for the ES e-mini future contract.
The default “out-of-the-box” analysis performed by Sentient Trader on the S&P500 places the 54-month cycle trough on the 4th October 2011 (and has done for some time now). This was my least preferred analysis when I discussed it in November last year because of the short cycles that preceded that trough. Last year I was keeping ST Outlook “clean”, and pure Hurst, but I think the time has come for me to introduce a racy concept that I have been nurturing for the last year: the concept of a 6-year cycle.
My reservations about the short cycles preceding the October 2011 trough were because of the negative underlying trend which should have prevailed at the time. However if we include a 6-year cycle in the nominal model that Sentient Trader is using, you will see that the underlying trend preceding this trough was not down, but neutral.
I know many Hurst purists will be shaking their heads and tut-tutting at the mention of a six year cycle, and so let me offer some thoughts to mollify. An analysis performed with the six-year cycle in the nominal model makes a good deal of sense at the moment, but I don’t insist that this means that there is in fact a 6-year cycle. Instead I think that we are witnessing an harmonic echo. Four 18-month cycles do of course make up six years, and three “6-year cycles” combine to produce the 18-year cycle. And so I think that the apparent 6-year cycle we are seeing at the moment is in fact an echo which has emerged from the combination of pure Hurst cycles, and will very likely fade away again.
There is an alternative analysis to the 54-month cycle trough on 4 October 2011, and that places the 40-week cycle trough there. This is not as good an analysis in my opinion, but for the sake of completeness, here it is:
The trough on 4 October 2011 must be of at least 40-week significance because of the price crossing above the 40-week FLD on 30 November last year (see chart below).
And so what is happening now? 115 days have passed since the 4 October 2011 trough, and so we are looking for the market to fall into a 20-week cycle trough. Because all cycles have been running short recently that trough could occur any time now, although a perfectly nominal length cycle would place the trough on 17 February 2012. The most recent 80-day cycle trough likely occurred on 25 November 2011, making 1 February 2012 the expected date for a perfect 80-day nominal cycle trough. There is a case to be argued for the trough on 19 December 2011 to be the most recent 80-day cycle, pushing the expected date of the next trough out to 25 February 2012.
The first week of February displays an interesting FLD pattern created by the 20-week and 40-week FLDs as seen here:
Of course price should fall below the 20-week FLD before forming the expected trough of the 20-week cycle (troughs mostly occur below the FLD, although it is not absolutely required). And there is an interesting piece of information provided by the 40-week FLD forming a trough itself on 30 January 2012, which indicates an approximate time for the peak of the 40-week cycle. When the 40-week cycle is forming a peak, the 20-week cycle is of course forming a (non-synchronous) trough.
There is something else that I find particularly intriguing about the current situation, and that is the possibility that the 4 October 2011 trough will turn out to be a straddled 54-month trough. I have a bit of a thing for straddled troughs, and on 6 April 2011 I presented the case for a straddled 40-week trough which occurred on 16 March 2011. That trough did indeed turn out to be a straddled trough (it is still there on the analysis presented at the top of this post), not a perfectly symmetrical one, but good enough.
If the trough on 4 October 2011 does turn out to be a straddled trough then we would expect the price movement to be fairly symmetrical around this trough. The symmetry inevitably breaks down, but try sketching in a mirror image of the price move from March 2009 until October 2011. I’m far too responsible to publish an image like that!
I’m sure you will agree that it is a sobering thought. If the 4 October 2011 trough does develop into a straddled trough (and with the current analysis there is no reason why it wouldn’t), then that is a possible path for price to take as it moves down to the next 6-year cycle trough expected late 2014 until 2016.
When was the last 54-month straddled trough? You can see it on the second chart of this post, in mid-August 2007. What happened after that trough? I will let the chart speak for itself!
Next week we will take a big picture look at the EURUSD forex pair.
Good trading everyone!