The August Trough 2

I know that whenever I take a holiday the markets are going to do something surprising, and I will be lying on the beach surreptitiously sneaking a look at the charts on a smart phone concealed in the pages of my summer read.

This year the August trough provided the surprise, not because there was a trough (which was expected, even if it came a bit early) but because of the magnitude of the trough.

I was expecting an 80-day trough to form in about mid August, following what I believed to be a subtle 20-week trough in early June. When the big bounce happened on 8 August 2014 I thought to myself – there we go, the 80-day trough has come in a week early, so everything is looking good.

But John’s post about the impending 40-week trough niggled at the back of my mind, and as the market rose vertically over the next two weeks, it became apparent that this trough was almost certainly an early manifestation of the 40-week cycle trough that John had written about.

How is it possible that I could have been a whole 10 weeks out in my analysis? I find puzzles like this fascinating, and one of the reasons that I enjoy Hurst analysis so much. (Another reason is that even when my analysis is 10 weeks out it is still possible to make profitable trading decisions: if I hadn’t been holiday I would have been standing by to enter a long trade as the market bounced out of the 80-day cycle trough, a trade that would have surprised me in a positive way!)

With the benefit of hindsight I think this is a correct analysis:

Breaking the rules

You will notice that the phasing at the foot of the chart is looking a bit like an amateur cut-and-paste job, because it is … Sentient Trader won’t give me this analysis with the default nominal model. And the reason is that as good as Sentient Trader is at being flexible in the analysis process, it simply will not allow a 20-week cycle to be only 70 days long. A cycle shape of 70-days must surely be an 80-day cycle, mustn’t it? This is where computer programs and humans part ways. Hurst said that good analysis was more an art than a science, and I think this is a perfect example. That analysis looks good to me, despite the “impossibility” of the 20-week cycle from February to April 2014.

As a matter of interest Sentient Trader will happily provide that analysis if you provide a nominal model with shorter cycles, such as I discussed in this post. Here is the result:

A shorter nominal model

Perhaps this adds weight to the suggestion that cycles are currently running shorter than the nominal model defined by Hurst that Sentient Trader uses by default (although as pointed out by William in this post, that does not mean that the cycles are actually running shorter than usual). But as a bit of a Hurst purist, I must admit that I prefer to stick to the usual nominal model, and accept the occasional “impossibilities”.

Is the August trough definitely a trough of 40-weeks? I think it is very likely, but there are few certainties in market analysis, and so here are the other options:

An 80-day trough

This is the analysis that I was looking at as we went into August. The big discrepancy in the magnitude of the troughs does not invalidate the analysis, but it does certainly make it less likely to be the true analysis. Note the circle-and-whiskers for the 40-week cycle which shows that the trough occurred well within a possible time-frame for the 40-week cycle trough, even in this analysis.

Here is another option, that the August trough was a late 20-week cycle trough:

A long 20-week cycle?

Here Sentient Trader struggles with exactly the same issue – the recent price action does not break down easily into the shorter cycles, with a short and then a long cycle. This option is possible, but as we have seen most cycles running shorter rather than longer recently, I think the 40-week option is much more likely.

Whether the August trough is of 40-week or 20-week magnitude, the one thing that is clear is the good M-shaped cycle that has completed:

SP500-4 29-08-2014

That M-shape is not so good with the option of the August trough being of only 80-day magnitude.

Let me know what cycle you think formed the August trough.

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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2 thoughts on “The August Trough

  • Jeffrey Young

    So David I noticed you cut and paste to get one of the analysis which you indicated Sentient trader was unable to perform due to short length of the cycles. However, did you consider that the 18 month cycle low may be misplaced. If I do a longer term analysis back to the 2002-2003 lows the 54 month cycle does not line up in a logical place and I am forced to choose between leaving Sentient traders choice or pinning the 2009 low as the 54 month which then changes the entire analysis and the 2002-2203 low is only an 18 month low which does not seem accurate. In fact an analysis using 09/10/2008 As its starting date shows the most recent 18 month low as 10/08/2013 and works out 08/08/2014 to be a 40 week trough on 08/08/2014). I am just wondering with all the pinning going on why an alternate 18 month low has not been considered in your discussion? The crux of the matter is that we did not have a weak third 18 month cycle but seemed to have by passed that altogether with the money printing .Could you please pull out the 6 year harmonic cycle. I believe your last mention of it said we would know how accurate it was by now. Thank you.