Commonality and hidden troughs – 9 February 2013 1


Hurst’s Principle of Commonality states that different financial markets move with a great deal in common. A result of this is that markets tend to form troughs and peaks at about the same time (sometimes at exactly the same time), even if the magnitude of those troughs or peaks is not the same because the cycles are phased differently.

Last week I discussed the concept of cycle dominance and pointed out that the 80-day cycle trough that we are expecting to form now in the US markets might be a subtle, or insignificant trough. Such troughs are often so subtle that they might be described as hidden troughs: the cycle is turning, but the trough formed in price is hidden from view because of the strong movement of the dominant cycle.

At such times I find it very useful to look at other markets, because thanks to commonality the hidden troughs will often be more obvious in those markets. Here are some other stock indices which show a clear move down into the 80-day cycle trough that we have been expecting. Here is the Euro-Stoxx index:

The European markets

And the DAX:

Clearer cycles in the DAX

And the FTSE:

And in the FTSE

The move down into the 80-day cycle trough is clear in each of these markets, and makes it likely that the same move down into the 80-day cycle trough has occurred in the US markets, and that the trough itself might have formed, albeit as a hidden trough.

S&P 500

The S&P 500 reached to new highs again this week, bouncing out of a possible hidden (or subtle) 80-day cycle trough on Monday of this week.

A hidden 80-day cycle trough?

We expected the 80-day trough to be subtle, and price might bounce a little further, but very soon now the 20-week dominant cycle will turn the market down.

Nasdaq

In the Nasdaq we are tracking the alternate analysis which phases the 18-month cycle trough (as opposed to the 20-week cycle trough) at the November 2012 low. Here too, as discussed last week we are expecting the formation of a subtle trough, which probably also formed on Monday.

Also hidden?

Euro/US Dollar

The Euro has been falling into the 40-day cycle trough which will cause a bounce on the way down to the 40-week cycle trough expected in March. This 40-week trough is still expected to be less significant than one would expect from a 40-week magnitude trough, but it is unlikely to be completely hidden.

Dropping into the 40-day cycle trough

Gold

Gold formed a small 20-day cycle peak this week. It might yet form a deeper 80-day cycle trough before turning up towards the 20-week cycle peak expected by May this year.

Rounded, clustered troughs

30 Year US Bonds

I mentioned last week that the 80-day cycle peak we have been expecting in US bonds might prove to be a subtle affair, and as the cyclic picture unfolds it will be clearer whether that 80-day peak occurred in January of this year (as shown on the chart below), or whether it is going to form as a very subtle peak now.

Subtle peaks

Crude Oil

Crude Oil is also exhibiting a subtle 80-day cycle trough as discussed last week. That trough might be forming now, or might have occurred in January 2013 as shown in this analysis:

Another hidden trough

US Dollar Index

We have been expecting the US Dollar to form a trough of 18-month (and possibly 54-month) magnitude. The strong bounce in the Dollar this week just might be the first move out of that trough, or it might be a bounce out of the last 40-day cycle trough before the big magnitude trough as shown here:

The 18-month cycle trough?

Either way, it is important to remember the great value of cyclic analysis, which is in being able to anticipate turning points. I am long the US Dollar out of this week’s trough. As the move develops we will be able to ascertain whether it is merely a 40-day cycle bounce, or whether it is the big move we have been looking forward to.

If you are a Sentient Trader user make sure you register on the Hurst Cycles Trading Academy, and gain access to our new course there: Working with Sentient Trader (the course is complimentary for ST users).

Have a great week and profitable trading!


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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One thought on “Commonality and hidden troughs – 9 February 2013

  • Randall Adrian

    Hello again David,

    I’ve been reading Christopher Grafton’s “Mastering Hurst Cycle Analysis” and I’ve viewed most of your educational videos. I’ve only developed the most superficial knowledge but the concept of the dominant cycle is particularly important to my trading.

    I trade options — vertical spreads in trending markets and iron condors in rangebound markets. Only recently have I related cycles to trending and rangebound markets. The reason that recognizing the dominant cycle is so important is that it would guide me in selecting the proper option strategy for the current market condition. When the dominant cycle is short (e.g., 40-day cycle), the markets will be rangebound and the iron condor is the right choice. When the dominant cycle is longer, it may be wise to stay with directional trades (vertical spreads).

    I included a link to a chart that illustrates your point about the 20-week cycle being dominant. I trade the RUT instead of the SPX but the same point applies. In the chart just below the price bars are the 10-, 20-, and 40-day cycle indicators; below these are the 10- and 20-week cycle indicators.

    Observe the price action and cycle indicators from the mid-November low. Notice how the cycle indicator peaks are above the upper dashed line while the troughs fail to make it below the lower dashed line. The dominant 20-week cycle has obscured the effect of the lesser cycles. The 10-day cycle is the only exception — it was able to dip below the line three times since the November low.

    Intermediate-term, directional trades have been perfect since November. Obviously, the party will end soon and the indexes will reverse into the 20-week trough.

    Here’s the link:

    http://screencast.com/t/6G2W1nuJ