When To Expect The 40-week Trough 4


The US markets squeezed up to new highs over the past week, reminding me why I always treat the “confirmation of a peak” information provided by a VTL cross with a small dose of skepticism (see this post about the breaching of the 20-week VTL).

The next cycle event that I am looking out for is the formation of the 40-week cycle trough. When can we expect it?

In the recent Hurst Trading Room podcast I discussed the possibility that the trough that formed in stock markets around the world on 7 May 2015 might be a trough of the 80-day cycle, as opposed to a trough of the 40-day cycle. The jury is still out in my opinion, but there is a good argument in support of the 80-day cycle trough. The first piece of evidence is the 204 days that elapsed between the October 2014 trough and May 2015 trough. 204 days is exactly one 20-week cycle (of average 136 day length) and one 80-day cycle (of average 68 day length).

204 days

Whenever I see a trough forming at exactly the average time of a combination of cycles I pay attention. Cycles are often distorted, and are subject to constant variation in wavelength (and amplitude) which makes analysis a difficult art at times. But when the numbers work out exactly it is often an indication that the mists of analysis uncertainty are clearing.

Here is the analysis in the S&P 500 with the 80-day cycle trough on 7 May 2015:

Mid July trough

Interestingly this analysis shows a steady and dramatic lengthening of cycle wavelengths, from a 20% short 20-week cycle between October 2014 and February 2015, to a 38% long 80-day cycle from February 2015 to May 2015. The lengthening of cycle wavelengths could be seen as a bearish sign because it indicates a shifting of underlying trend from bullish to bearish (or very bullish to less bullish).

The analysis suggests that the 40-week cycle trough is expected to form in mid July 2015.

By contrast here is the alternate analysis, with the May 2015 trough as a trough of the 40-day cycle:

Early June trough

This is by no means an out-of-the-question analysis. In some ways it is a more satisfying analysis because it shows less of a dramatic change in the cycle wavelengths. This analysis expects the 40-week cycle trough sooner, in early June 2015.

One of the reasons that I prefer the former analysis, with the 80-day cycle trough in early May 2015 is because it is a valid analysis across many markets. Such as the Dow Jones Industrial Average (the default analysis in Sentient Trader):

The DJIA

And here is the German DAX:

The DAX

The DAX has been particularly tricky recently because of that long bull run through the first quarter of this year. But the analysis above with the 80-day cycle trough in May 2015 (note no pinning of troughs) looks good, and also suggests that the 40-week cycle trough will occur in mid July this year.

Owing to the almost-fractal nature of cycles in the market we will see a trough form in early June no matter which analysis is correct, but I favor the option of that trough being of 40-day magnitude, and expect the 40-week cycle trough to form in July. It will be interesting to see whether price manages to remain above the 40-week FLD on its way down to the 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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4 thoughts on “When To Expect The 40-week Trough

  • Jeffrey Young

    David,

    So now that price has convincingly crossed the 20 day FLD is it your opinion that this is not a B category interaction and the pins as I have them in the chart is likely more accurate or do you still think the 80 day low occurred on May 7th instead of April 6th? Another question. I get notification of the podcast but It is always 5 days after the posting of the video. I am subscribed. Is there a way to be informed the same day it is posted. One last point In the attached chart I noticed that with the pinnings where they are there were two bearish 80 Day Cycle M shapes in a row followed by the current bullish shape. Is this usual and can that be used in helping to determine which analysis is correct or likely correct? Some B reactions do run below the FLD. Would there be any significance to that?

    • David Hickson Post author

      Hi Jeffrey. Amazingly it is still not possible to be absolutely confident with choosing between the two options. But so far the price action in the S&P 500 has all been within last Tuesday’s big move, which does look more like a “B” in my opinion. On the other hand the other markets look more like F-category interactions. And so the puzzle persists. Personally I am tending more towards the F-category at the moment. I am not averse to going long however … it could be a C-category or an early A-category bounce out of the 40-week trough.
      When B-category interactions drop below the FLD it is an indication of the weakening of the bullish underlying and a general move towards bearishness.
      The best way to get instant notification of a podcast is to follow Sentient Trader on twitter – those alerts go out a few seconds after the video is available.

  • Jeffrey Young

    So I let Sentient Trader do its thing and the only pin I had to make was the recent 80 day cycle low in early May which it was undecided on. All the M cycle worked out bullish and nicely with this analysis and there was no false VTL penetration either. I guess the difficult piece to this is accepting that the 20 week cycle was not the on with the deepest magnitude or the strongest rise out of its low. That could mean May’s high might be the 40 week high if price cannot break above the 20 day FLD and then violates the 20 week VTL. I am not saying this analysis is correct but I think it is worth considering. David you have often said that Sentient Trader has often humbled you and while it has not outrightly identified May 7th as the 80 day low if price does break back above the FLD it more than likely will. Don’t fight the Sentient Trader!

    • David Hickson Post author

      This is a very possible analysis, but as you say there are drawbacks to any of the options. I like to ask myself what the “worst case” scenario is for each of the options and trade with caution, keeping in mind that possibility.