Early Peaks and Late Troughs – 17 November 2012 5


Stock markets around the world have been falling for two months now. As a cyclic analyst when a market falls one looks ahead to the next event, which will of course be a trough, and then a bounce back up. And so I have been writing recently of the upcoming 20-week cycle trough. That trough might have occurred yesterday, as the US markets pulled up strongly into the weekend (the market surely does have a sense of humor!) But identifying a trough after one day is a fool’s game, so we will have to wait and see what next week brings.

As the markets fell yet further this week, I was reminded of one of the simplest and yet most important conclusions that can be drawn from Hurst’s Cyclic Principles: when the underlying trend (combination of the net effect of longer cycles) is bearish then peaks will occur early, and troughs will occur late.

In June of this year when I identified the 40-week cycle trough, I wrote that I expected an early peak to the next 40-week cycle (because of the bearish underlying trend), which has manifested: the September peak occurred about 100 days into the average length of 273 days for a 40-week cycle. That is only a little over a third of the way into the cycle, or about 37%. I don’t expect that peak to be exceeded in the current 40-week cycle.

The second part of the phrase is coming into play now: troughs will occur late, and as we wait for the 20-week trough to form it is best to be patient and remind ourselves to expect the trough late. And so this week I will take a step back and look at the unfolding shape of the longer cycles.

S&P 500

The current 40-week cycle is taking on a bearish shape. I expected it to be more bearish (or less bullish) than the previous 40-week cycle, and in this chart you can see that initially that looked as if it would not be the case because of the higher peak in September. But the early peak does qualify this as a bearish shape, and portends an extended move down into early next year, where the S&P 500 should form a trough at a level lower than June’s trough of 1262.

Turning bearish

Nasdaq

The Nasdaq has fallen harder recently than the S&P 500, and the emerging M-shape of the current 18-month cycle is clearer. Here too the 40-week cycle, despite forming a higher peak in September is looking suitably bearish to complete the 18-month cycle’s M-shape.

A clear M-shape

Euro/US Dollar

The long term picture in the Euro shows the emerging shape of the new 18-month cycle. It is bullish so far, but not as bullish as the cycle that developed out of the June 2010 trough, although that trough might of course have been of greater magnitude, and so we cannot hold that against the current cycle. Nevertheless there is a bearish undertone to the unfolding cycle shape.

Not as bullish as might be expected

Gold

This even longer term chart of Gold reveals just how weak the recent 40-week cycle was, the weakest 40-week cycle in over four years. I am still undecided as to whether the peak in September 2011 was of 18-month magnitude or of 54-month magnitude, as discussed several times previously. The analysis presented in this chart chooses the former option, which should see the next 40-week cycle carry Gold to higher prices. Whichever analysis turns out to be correct, the current 40-week cycle should be more bullish (or less bearish) in shape than the previous one.

Expecting more bull

30 Year US Bonds

The current 20-week cycle shape in Bonds is surprisingly bullish as they approach the level of the July 2012 peak. It implies that the underlying trend active in Bonds at the moment is very bullish … which increases my bearishness towards stocks because the two are mostly highly inversely correlated.

Looking bullish

Crude Oil

Crude Oil is exhibiting the cycle shape that I was expecting to see in the US markets. The current 40-week cycle is decidedly more bearish than the previous one.

 A bearish shape

I find it very useful to keep an eye on many diverse markets, and the picture in Crude Oil demonstrates why: when some markets are providing mixed messages, (such as the US markets) I choose the answer that matches most closely with the markets that are providing more consistent answers (such as Crude Oil).

US Dollar Index

Finally the current move out of the September 2012 trough in the US Dollar is looking very bullish, with late peaks and early troughs. As I have been discussing over the past few weeks I am undecided about whether the September trough was merely of 20 week magnitude, or whether it might be an early 54-month trough, which we were expecting to occur early next year. Last week I presented the former option, and so here is the alternate, more bullish possibility:

The bullish Dollar

It is still a bit premature to commit whole-heartedly to this analysis, but until signs of weakness begin to show I’m happy to take a bullish ride – that is becoming increasingly rare nowadays!

Have a good week, and I wish you 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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5 thoughts on “Early Peaks and Late Troughs – 17 November 2012

  • stuart mendel

    Hi David
    Could you please indicate how you are getting the software to position the 40 W peak in Oct 2012 for GC? I am not able to expand the cycle by pinning.
    Best regards
    Stuart

    • Paul Johnson

      Hello Stuart,

      You will be “restricted” in where you can Pin the 40 Week Trough, by where the other troughs have been placed around it in your analysis, i.e. you can’t stretch a trough to where it cannot be placed within the rules that Hurst defined (-33% to +50% of the Nominal Model wavelength).

      The analysis for Gold in Hurst Cycles Outlook, 17 November 2012 uses an analysis period from 4 October 2002 to 16 November 2012. It is an Inverted Analysis and is using a standard, daily Nominal Model. The 40 Week Trough has been pinned at 5 October 2012.

      Kind regards, P

  • tommaso vento

    i had a trial period and although i admit its a good program, i found the explication are sometimes confused. As for the the length of the cycles(that is the most important thing). In the charts you have cycles of 26.6 and 17.8, but in the written comments you always speak about 20 and 40 week cycles. are this different cycles? Furthermore, in the charts are indicated cycles different from the cycles coloured on the right bottom. For instance, in the Us dollar index you mention a 62 day cycles that is to be found nowhere in the chart. what do this different way of signaling the cycles mean? Thanks

    • Paul Johnson

      Hello Tommaso. I agree there is a lot to learn about trading Hurst Cycles, which is why we have such a wealth of free training materials. Sentient Trader is a very powerful trading tool and is used in many different ways by our clients.

      40 Days, 80 Days, 20 Weeks, 40 Weeks, etc. are the names which Hurst gave to cycles in the Nominal model. It is much easier to talk about the 40 Day Cycle, rather than the 34.1 Day Cycle. You can see the Nominal Model and read some basic facts about understanding Hurst Cycles here: About Hurst Cycles.

      We recently started our first FLD Trading Strategy course. It lasts for 6 months and takes students every step of the way to trade the 20 Day Cycle profitably. The next course begins in mid December. You can find out more about it here : FLD Trading Strategy

  • tom russo

    sentient kicks ass and takes names again!!!!!

    great call david…

    i have to admit, i used a Gann angle and a candlestick analysis with Sentient leading the direction of the bet to get in…