Cycle Dominance – 2 February 2013 8


Cycle dominance is an aspect of the Hurst cyclic model of financial markets that is often dismissed as a small detail on the way towards reaching a final analysis. Identifying the dominant cycle (or dominant cycles, because there can be more than one) is one of the first tasks one performs when analyzing a market, but it is by no means a small detail.

If a cycle is dominant it tramples shorter cycles underfoot as it fulfills its cyclic path. The result is that the shorter cycles seem to disappear. Of course they don’t disappear at all, but the strength of the dominant cycle makes the identification of the shorter cycle troughs (and peaks on the way down) a tricky business.

The interesting thing about dominant cycles (when applying Hurst’s Cyclic Principles) is that they shift: for a period of time one cycle will be dominant, and then another cycle rises to dominance.

If one can correctly identify the dominant cycle then the path ahead for the market in question becomes much clearer because the market will tend to trace out a simple cycle shape (up and then down) for that dominant cycle.

There are several ways of identifying the dominant cycle, but there is a simple trick I have found which proves very reliable: when a cycle rises to dominance the first quarter of that cycle will often (but not always) exhibit clear and simple cyclic moves, by which I mean a simple up and then down move (indicating that the quarter-cycle is itself also dominant for that period). Here are some examples to illustrate:

A 40-week dominant cycle

This chart shows the 40-week cycle from October 2011 to June 2012. Note a few things: the clearly dominant 40-week cycle; the insignificant and hard-to-identify 20-week cycle trough (the pile of diamonds at the end of January 2012); and the clear cycle move for the first 80-day cycle (quarter of the 40-week cycle) from early October to mid November 2012, which provided the tell-tale sign that the 40-week cycle was rising to dominance.

A dominant 20-week cycle

Then from June 2012 the 20-week cycle rose to dominance. Note here: the dominant 20-week cycle (marked with yellow arrows); the fairly insignificant and difficult to identify 80-day cycle trough (at the end of August, or early September 2012), and the tell-tale (though less pronounced) cyclic moves for the first quarter, the 40-day cycle (marked with white arrows).

And so what is happening now in the markets?

S&P 500

I believe that the 20-week cycle is still dominant in the S&P 500, as can be seen here:

20-week cycle still dominant

Note the tell-tale clear cyclic move for the 40-day cycle from November 2012 into the trough at the end of December 2012. That implies a dominant 20-week cycle, and also suggests that the 80-day cycle trough we are expecting now might be insignificant and difficult to identify.

It also implies that we expect the market to describe a clear 20-week cycle, which is why I continue to expect a persistent decline soon, carrying price down to the 20-week (and synchronous 18-month) cycle trough expected in about 10 weeks time.

Nasdaq

The Nasdaq also has a  20-week dominant cycle, implying the same fate as the S&P 500. In this chart the two prior dominant 40-week cycles can be seen:

Two dominant 40-week cycles

It could be argued that the 40-week cycle is still dominant, and that the trough around New Year should be phased as a trough of the 80-day cycle. This would imply that the cycles are running short in the Nasdaq, and so effectively it is saying the same thing – a short 40-week cycle as opposed to a long 20-week cycle.

Euro/US Dollar

The dominant cycle in the Euro since mid 2010 has been the 18-month cycle. The clear cycle move of the 20-week cycle from July – November 2012 implies that the 18-month cycle is still dominant. The 40-week cycle trough expected in March/April this year might as a result be a relatively insignificant trough. 

An 18-month dominant cycle

Gold

The dominant cycle in Gold following the September 2011 peak was fairly clearly the 40-week cycle (observe the two clear 80-day cycle shapes). But it looks as though dominance has shifted to the shorter 20-week cycle following the peak in early October 2012 – note the clear 40-day cycle shape.

A shift to the shorter cycle

This implies that the 80-day cycle peak will be fairly insignificant and difficult to identify – indeed it has been, as we have discussed over the past two weeks. It also implies that we should see a clear move up into the 20-week cycle peak expected in early May this year.

30 Year US Bonds

Bonds are exhibiting more of a mixed picture in terms of cycle dominance. The 20-week cycle from July – November 2012 was dominant (supported by the clear 40-day cycle from July – August 2012). That dominance of the 20-week cycle implies a rise to dominance of the 18-month cycle (the 20-week cycle is the quarter cycle of the 18-month cycle), which is why we are seeing such a strong move down at present. It also suggests that the 80-day cycle peak expected now will be fairly insignificant (as well as the 40-week cycle peak expected in about April – although as the cyclic picture unfolds that will become clearer). 

A more complex picture

Crude Oil

Crude Oil has been exhibiting a very clear 20-week dominant cycle since the late June 2012 40-week cycle trough. This dominance was supported by the clear 40-day cycle in November of last year. This is why I have been expecting the recent 80-day cycle trough to be insignificant (and hard to identify), exactly as it has been. The implication of the dominant 20-week cycle is that we will see a clear and strong move down to the 20-week (synchronous 18-month, perhaps also 54-month) cycle trough.

A very clear 20-week dominant cycle

US Dollar Index

Dominance has been shifting into the shorter cycles in the US Dollar recently, although the 20-week cycle is probably still holding sway and will bring the dollar down into the 54-month cycle trough we have been expecting.

20-week cycle most dominant

Cycle dominance is an important concept which explains why cycles sometimes seem to “disappear”, something which they never do of course (according to Hurst’s Cyclic Principles). Identifying dominant cycles in the market alerts us to expect subtle troughs (and peaks), and aids in mapping out future price movement.

Have a great week, happy analyzing 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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8 thoughts on “Cycle Dominance – 2 February 2013

  • John Oestreich

    David,

    Great analysis. One sometimes forgets to be mindful of the dominant cycle and being aware when it is shifting (to a longer or shorter cycle). Your point of how shorter cycles can sometimes “disappear” as they get overwhelmed by the dominant cycle price action is a great illustration.

  • Randall Adrian

    Hello David,

    Forgive my ignorance but I don’t understand the numbers here. Let’s take your first chart (40-week cycle in the S&P500). I can certainly see the cyclic move from early October to late November. You refer to this move as an 80-day cycle but that time span doesn’t comprise 80 calendar days let alone 80 trading days. You also refer to the 80-day cycle as a “quarter” of the 40-week cycle and again, the numbers don’t work out. I can see, however, the light blue diamond labelled “72.8d” occurs four times on the chart — from that perspective, it’s a quarter of the larger cycle.

    Can you clarify this for me?

    • David Hickson Post author

      Hi Randall

      The 80-day cycle is one of the cycles in Hurst’s nominal model – which is simply a list of the cycles which influence financial markets. We call it the 80-day cycle, but the actual wavelength of the cycle varies (because of Hurst’s principle of variation), and the average wavelength is actually 68 days (which is why some analysts call it the 10-week cycle). I speak about the quarter cycle because as you noticed there are 4 x “80-day” cycles in a 40-week cycle. If you have 9 minutes to spare then this video explains these Hurst cycle concepts. You can also view the video from this page (it is the fourth video in the series).

      • Randall

        Thank you so much for your detailed and patient response. I will continue to explore your website and utilize its educational resources. I’m an options trader and I use directional and non-directional strategies. I’ve been fairly successful with my own analysis and discretion but a knowledge of cycles should add more mechanics and purpose to my trading. As an options trader, I must be mindful of price movement and time but conventional technical analysis doesn’t address the issue of time — thus my interest in your website and sofware.

  • thepatienttrader

    Hi David,

    Thanks for the analysis update. Very interesting point about the dominant cycle obscuring the shorter ones.

    With regards to the 18th month trough forecast, at some point several months ago, it was theorized that the trough could take the market, below the June 2102 level. Does that still seem like a likely possibility? Given the strength of this latest 20 week cycle that seems rather remote….?

    Please keep posting!

    • David Hickson Post author

      It does definitely seem unlikely at the moment that the 18-month trough will be below last June’s levels, although I have learnt never to say never when it comes to the markets! I think a possible reason for the more bullish 18-month cycle shape is the concept of a 6-year harmonic which I have mentioned a few times in these posts.