The last 12-18 months in the U.S. stock indices have been somewhat challenging for both the technical trader and the fundamental investor. The yearly chart of the S$P 500 below shows that 2015 was a rare down year. That chart also provides one with a great perspective of the intermediate and long term trend of the market without having to resort to any technical indicators or complex algorithms. It shows the spectacular uptrend from 1982 through 2000. It also puts into perspective how much gain was erased in the 2008-2009 decline! The question on everyone’s mind is where are the markets headed from here.
Thanks to the work of J.M. Hurst, the cyclical trader and analyst has fared much better the last 12-18 months. In my prior post I pointed out the dominancy of the 40 day wave. It is still showing the same level of dominance today as seen in the ES daily chart below. All of the shorter waves (not shown) exhibit the same level of consistency down to the shortest intraday wave. The dominancy envelope is ostensibly the sum of the waves longer than 20 weeks.
One of the fundamental differences between an analysis based on Hurst’s time domain model and one based on his spectral domain model is the harmonic relationship of the price waves. The majority of Hurstonians apply Hurst’s time domain model with its fully synchronized troughs and simple harmonic relationship (i.e. related by a factor of two) among the prices waves. The harmonic relationship among the price waves in an analysis based on Hurst’s spectral model will sometimes exhibit a complex harmonic relationship, particularly over long runs of data. The reason for the difference is that an analysis based on the spectral model takes into account the amplitude modulation of the individual components which comprise the price waves which, as Hurst explained in Profit Magic, causes the variation in the period of the individual price waves. Adding to the complexity is the fact that each price wave’s modulation is unique which mitigates against the related waves from expanding and contracting proportionately.
This phenomena has been very much in evidence the last couple of years. There has been a pronounced diminution of the amplitude of the 80 week wave (not shown). This has resulted in a contraction of the 80 week wave period versus its historical average. This has also affected the 40 and 20 week waves in addition to the 4 year wave. The chart above is a good example. The yellow arrows identify, arguably, 80 week lows based on the spectral model. However there are 12 oscillations of the 40 day wave between those lows which will not fit into a simple harmonic relationship model. Regardless of my “expectations”, I make it a point not to argue with the math.
Fortunately from a trading perspective it is not that important due to the fact that one’s trading cycle is relatively short compared to the 80 week wave. The modulation at the trading level is much easier to handle.