Turning Bearish 16


I like to look at a Hurst analysis from many different angles, and while considering the progression of “bullishness” in the US stock markets this week I stumbled across a possibility that I would love to hear your opinion about. It has bearish implications, and so this post carries a BEAR warning!

But before we get to that, here is a follow-up on the 18-month VTL.

I wrote last week about price crossing below the 18-month VTL, and mentioned that I would want to see the median price on a weekly chart cross below the VTL before declaring that the 54-month cycle peak was behind us. That happened this week:

Weekly median price crosses the VTL

The week was characterized by big-range alternating up and down moves. When that happens I always suspect it is because price is struggling to cross an FLD or a VTL, and of course this week it was the 18-month VTL:

Back-and-forth across the VTL

But now let me get to the analysis that I would like to get your feedback about. I have written before about how I like to calculate the “bullishness” of a cycle. Because of the way in which multiple cycles combine, and the M-shapes that result in the price movement we expect a pattern in the “bullishness” of the cycles: A bullish cycle followed by a bearish (or less bullish) cycle, and then a more bullish cycle, then a less bullish cycle and so forth.

I have been watching two analyses over the past few months (see this post for an explanation of the differences). Here is one of them with the “bullishness” of the 80-day and 40-week cycles marked:

An incongruent Bullishness

The current cycle figures assume that the 40-week cycle trough forms today, which is a premature assumption, but it allows me to “pencil in” the figures.

There is a problem here: the sequence 75% – 92% – 57% does not follow the expected pattern of Bullish – LESS bullish – Bullish. What is wrong? Here is a longer term view which shows this analysis:

SP500 10-10-2014

Looking at the last two years it easy to see why there are analysis questions – choosing between the troughs in a strong bull move is difficult.

Let me get to the point. Here is an analysis that resolves the bullishness “problem”:

A later 18-month cycle trough

What do you think? Is it possible that the 18-month cycle trough occurred in April instead of February?

The analysis doesn’t break down as well in the shorter cycles, but it does resolve my bullishness problem.

Note as a matter of interest that this analysis does not actually affect the 18-month VTL, which Sentient Trader draws correctly according to Hurst’s Rule #2: that a VTL must be drawn so as not to intersect price bars (page 7, Lesson 2 of Hurst’s Cycles Course).

Here is the recent “bullishness” when applied to this analysis:

No problem!

This analysis is more bearish for the next few months because as shown in the chart above the next 80-day cycle is expected to be bearish, as opposed to a bullish 80-day cycle bouncing out of a 40-week cycle trough.

The more I consider this analysis, the more it makes sense to me, and the more bearish I feel. With the 54-month cycle peak behind us (which is the case no matter which analysis is correct) we are looking at a bearish year or two, and I wouldn’t be surprised if that bear starts exerting itself fairly soon after the 80-day cycle trough we are expecting now.

Let me know what you think!


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 “Turning Bearish

  • bryan

    David,

    I have been focusing on commonality as I have mentioned in some previous reposonses. What I have observed is that there are ‘groups’ of stocks that have near identical phasing (allowing for variability) with the overall market. There are other ‘groups’ that appear to be slightly out of phase, maybe 10 to 20 weeks out of phase. Without talking about straddles or fundamental interaction, the 40 week low in the summer of 2013 may provide an example. some stocks I follow show June 2013 to be the 40 week low. There are others that went on to make lower lows in August, so for those the 40 week is shifted–or slightly out of phase with the overall market. The lows in August then make 20 week lows in December, just as your alternative analysis.
    But for the overall market I have problems with the 20 week December 2013 low. The feb 2014 violates this low then makes new highs for the 40 week cycle–not preferable. Once a 20 week low has been violated, the only way to new highs is for an intervening 40 week low in my opinion.

    Years ago on an old message board (raging bull) Airdale and another individual debated this point. I will look for the image and may post a follow-up to illustrate this point. The individual never revealed which stocks comprised the different groups. I do believe airdale did recognize different phasing for semiconductors. This all relates to the variability among cycles within different industries. Another example is the oils. I do not think august was the 40 week low for this group.

    bryan

    bryan

    • bryan

      The chart was constructed in 2006 by airdale and represents a discussion regarding the phasing for ‘groups’ of stocks–commonality. I have observed that groups of stocks may have a common 40 week low, but another group may make a 40 week low out of phase with the general market. There has been much debate about the 4.5 yr low in ’02-’03 and airdale offers an explanation.

      This chart argues that for 2 groups of stocks, 2002 was the low; however, for another group 2003. Just as the late ’08 – early ’09 lows. Airdale considered, group #2 (the stocks marked with red lines) the dominant cycle phasing for the overall market. The overall message I am trying to convey here is that an index represents the sum of all the stocks cycles of that particular index. They usually do not all make 40 week lows at the same time. Some may be days, weeks, or months apart. Constructing a commonality model, may provide insight for explaining the overall cyclical structure of the market. Interestingly, as David has shown an alterantive phasing, I believe this phasing is valid for a certain group of stocks.

      bryan

      • William Randall

        Hi Bryan,

        It is nice to see that others have noticed the unusual phasing of the 40 week wave. When I apply Hurst’s 40 week bandpass filter to the indices it is also currently showing a phase shift to the right of the 20 week lows. This is probably resulting from the fact that the 80 and 20 week waves are so dominant and the 40 week wave is just taking up the slack.

        Nice find!

  • Doris

    Hi Davi:

    I perform time symmetry AND some planetary.

    I am pulling out stats that tell me we are going into a very bearish period here much more extenuated than anything I ever imagined.
    I thought that when cycles all bottomed in Dec and Jan that this bearishness would lift so I started to do simple aggregate statistical and probability analysis of negative influences configurations …the stats are alarmingly and overwhelmingly bearish..
    I am working on this project currently and think the top is in..as a matter of fact we saw it from my work in September so your work
    lines up to my work. Looking forward to future posts.

    Doris

  • José

    Hello all

    At http://www.analisisciclico.com I develop a mathematical approach to cycles; I’m also a Sentient Trader user for several years and it is fascinating how the mathematical approach and phasing analysis match each other but with two different prisms of the same phenomenon

    I fully agree with you David that we are entering in a bearish mode and probably this phase will lake for 2 years, I think this potential top is also of a 9 years cycle.

    I´m also agree that the 18 months cycles is being difficult to phase right now, it is also seen in the mathematical approach where the 18 months oscillation has almost disappeared meanwhile others oscillations arise as more dominant like the 40 weeks oscillation.

    Here is how the 54 months oscillation and the 40 week oscillation appear in my approach…

    I’m also agree that we are near to form a 80 day cycle thought in the coming days, and that, in my opinion, it will be the moment of truth for this market; weather or not the wave shape of the current 80 day cycle is bearish or not, if the next peak of the coming 80 day cycle holds bellow all time highs we will enter in a “cycling down” mode for 2 years

    See also the current 80 day cycle oscillation

    Hope to help

    Best

    José

  • Derek Frazier

    Hello all,
    Thank you for the post, David. The market has clearly shown that it has broken the VTL indicating a peak of the longer cycle. There was no doubt about it.

    I just wanted to say that I expect equities to form a channel down that may not be as bearish as one might think. There are so many technical levels below us that it will make trading either fun or difficult if cyclic rules are not followed.

    For instance, there will surely be long trades that develop below, as traders realize that they can buy at value. Meanwhile, as cycle traders, we know that the direction is unanimously down.

    VTL breaks to the down side will be fun.

    Cheers, David

    • David Hickson Post author

      Hi Derek. That is a good point – one of the dangers of publishing a post that indicates the markets have turned in one way or the other is that the markets are very likely to do the exact opposite straight away! I expect we’ll see a fairly strong knee-jerk reaction bounce out of the 80-day cycle trough. As you say, there will be plenty of bounces, even if the overall trend is down.