The Question of Magnitude – 25 January 2014 16


Last week I explained why I thought there was weakness ahead for stock markets around the world. This week the markets obliged and started to show some of that weakness. I believe there is more to come.

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It turned out to be a good week to launch our new Hurst Signals service, with many very profitable trades. I published the chart from Hurst Signals last week with a short D-category trading opportunity in the S&P 500, and here is how that turned out:

A profitable short trade

The question now is “how far is this move going to go?” I often say that trading according to Hurst cycles is a very robust process, because even when your analysis is not perfect, or there is some uncertainty in the analysis it is still possible to make profitable trading decisions. This is because of the fact that an analysis tells us whether a market is likely to go up or down of course, but it also tells us the likely magnitude of that move because of the strength of the cycles involved. And if we are wrong about the magnitude there is often still money to be made because we are right about the direction.

This week provides a good example. That D-category trade is made on the assumption that the market is moving down towards the 40-day cycle trough. It is possible, even likely given the extent of the fall over the past two days, that the 40-day cycle trough has already occurred, on 13 January 2014, as shown here:

An early 40-day cycle trough

Both analyses are still possible, but the latter is more likely in my opinion. That means that the magnitude of the current move down is not that of a drop into a 40-day cycle trough, but a move down into a 40-week cycle trough, as shown here:

Heading down to the 40-week cycle trough

That certainly explains the sharp move of the last two days, and indicates that we could expect a bigger move still to come, into about mid-February.

Luckily (and this is why I call it a robust trading process) that doesn’t affect our trade. The D-category trade would turn out in retrospect to have been a much more profitable F-category trade.

Euro update

Two weeks ago I discussed the Euro/US Dollar forex pair, and I pointed out an upcoming long trading opportunity. I posted a Hurst Signals chart which described that opportunity in more detail. Price was expected to rise to the FLD in a G-category interaction, and then fall to the 80-day cycle trough, before turning upwards and providing a great long trading opportunity. (In fact read the comments below the post for an astute forecast which includes the dates for those moves). Here is what happened:

An A-category long trade

If you haven’t yet subscribed to Hurst Signals, do so before our January launch offer ends.

Have a good 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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16 thoughts on “The Question of Magnitude – 25 January 2014

  • William

    Nice analysis of the S&P500. I agree that price is falling into a 40 week low. My question is where does your analysis place the prior three 40 week lows? By simple harmonic definition at least one of them is an 80 week low which raises the possibility that, depending on the phasing, price is also falling into an 80 week low which is always a great long entry.

    • David Hickson Post author

      Hi William. The prior 3 40-week lows that I have are: June 2013; June 2012 (that is a long 40-week cycle!); and October 2011. Your comment goes to the heart of what I was trying to express – it is all a question of magnitude: we know there will be a trough which in my opinion will be of 40-week magnitude, but it might be double that, and turn out to be a trough of 18-month magnitude. The recent constant bull move makes the identification of troughs quite difficult, but for me the October 2011 trough was the most prominent, and so I place my 18-month marker there. There have been 27 and a half months since then, so most likely one 18-month cycle and one 40-week cycle … which is why I think 40-weeks is the correct magnitude, but I could be wrong, and might need to reconsider the October 2011 trough if there is a very big bounce out of the upcoming trough.

      • SilentOne

        Hi David,

        The question of magnitude is very relevant right now for stock markets. I’ve been meaning to make a post on the $SPX and will get to it shortly on my Sentient blog.

        My take is that the Nov. 2012 low was a contracted 4 year cycle low (which in retrospect was very bullish at the time). This is what drove the $SPX to such a great year last year. Now I think we are approaching the first 18 month cycle top out of that low. My phasing has Nov. 2012 and August 2013 as 40 week lows. The next one is due this summer which will also be an 18 month low.

        With this phasing, a 20 week low is due sometime this week (Jan. 28-31st). The $SPX is likely to rally one more time and possibly to a new high. But from the next top (within 4-5 weeks?), there will be a sharp correction into summer lows. The correct phasing is everything right now in terms of determining trades. It is very difficult to have high confidence in phasing such a strong market. But if we make a good low this week, I’d consider the phasing just described.

        Having seen a possible contracted 4 year cycle should mean that cycles should now lengthen after the Nov. 2012 low to nominal Hurst cycle periods (ie. 40 weeks should run close to 40 weeks and not 32 or 33 weeks). I am looking for an important summer low.

        cheers,

        john

        • David Hickson Post author

          Hi John. That is a very interesting analysis indeed, and similar to one I’ve been considering in the Nasdaq. I’m going to set it up in ST and keep a close eye on it. I look forward to seeing your posts about it, certainly it explains last year’s unremitting bull!

        • bryan

          Longer term phasing has certainly been challenging and frustrating. I believe the principle of commonality can provide some assistance. I have recently started a project tracking the 30 DJIA stocks through 4.5 yr cycles–Noting where each makes its 80, 40, 20 week lows. I also track AMZN and AAPL, along with other indicies and sectors. Interestingly, AMZN and AAPL are at different places.

          AMZN had a 40 wk 8/13 (just has john has labeled the NDX 40 wk trough) which would indicate an upcoming 20 wk trough
          AAPL had a 40 wk 4/13 and has another 40 wk due soon.
          You can use this to your advantage to track under/out performance of individual stocks/sectors relative to the indicies.

          Since the indices are the sum of the cyclic components knowing what the majority are doing should provide some clues.

          There is much more to say regarding the principle of commonality.
          David I am not sure if you study individual stocks and how they relate to the major indicies, but that might be a good post to consider.

          bryan

  • BobP

    David, I notice that you have three visible pinned troughs and there could be others on other dates. How much different is the ST analysis without those pinned troughs?

    • David Hickson Post author

      Hi Bob. The simple answer is that without the pins you will see an analysis similar to the Hurst Signals chart (in other words price is now moving down into the 40-day cycle). On Hurst Signals charts the pins are always displayed so that subscribers can see where we have “messed with” the analysis. To get a little more complicated I should point out that simply pinning the 40-day trough in mid-January will result in ST wanting to shift the 20-week trough from early October to November, which is wrong in my opinion and the reason why you see three pinned troughs there. It is one of those interesting analysis puzzles – the analysis process that ST performs is fairly complex, and pinning troughs can sometimes have unusual results, but with a bit of persuasion (such as pinning three troughs) ST will usually bend to my will!

      • BobP

        Thanks David. I really liked it when you upgraded the pinning feature. It makes it much easier to look at alternates, but as you suggested caution still needs to be exercised.

      • BobP

        David, On my SPY chart, this trough we are near or have completed right now looks like it could be a 40w trough. That is different than my ES analysis and I’m watching both carefully. I’ve found with ST the analysis of SPY and ES sometimes diverge but usually come back together on the big picture.

  • Robin

    David,

    I’m already short the S&P but I would like to add to my position. While the G trade unfolds, will Hurst Signals identify a short entry for the H trade (assuming we are in a F trade)? If so, what will be the trigger signal… 10-day FLD cross?

    Thanks.
    Robin

    • David Hickson Post author

      Hi Robin. At present Hurst Signals is still calling this trade as a D-category trade, but unless we see a big bounce up soon it will adjust that and re-label it as an F-category trade (39 days is already long for a 40-day cycle). Then it will look for a G-category interaction where price rises back to the FLD, and will look for opportunities to get into a short H-category trade (where you could increase your short position). H-category trades are notoriously difficult to get into because price often doesn’t clear much above the 20-day FLD. The Hurst Signals system is fairly advanced in its understanding of the FLD strategy and will use the 10-day cycle FLD if it can (which is why the 10-day FLD is plotted on the six-week view charts as a matter of interest).

      • Robin

        David,

        Could you elaborate a bit more on how is generated a Hurst Signals analysis? Is it an entirely automated software driven process or you review yourself the placement of the labels before they get issued?

        Thanks,
        Robin

        • David Hickson Post author

          Hi Robin. Hurst Signals is a combination of both. The software runs automatically, and updates the analysis a few seconds after the close of each bar. The labelling process is automated, but we have a small team who monitor the analysis (pinning troughs where necessary and so forth), and also monitor the identification of the price and FLD interactions.

  • Derek Frazier

    David
    If we are considering a top here, we first need a change in Sigma L. Objectively, this can be calculated when an 80 or 40 week target is not met. Selling short also requires a mid band transaction off the trading cycle that will lead to a target of choosing. With phasing problems inherent in this pseudo trend, my opinion is to remain wary of shorts and to ride the pseudo lightning until you know it is over: when sigma L has turned down due to a 40 week target not being met. Since this hasnt happened, I think we are in for more up.

    That in mind, using the smaller cycles…This past trade on SP500 was a great one! Bravo.