Tuesday, September 18, 2012

David Hickson - ST Hurst Outlook

(15 September 2012) The analysis dilemma we are presented with this week has to do with the shape of the current 18-month cycle. (If you know me well enough you probably guessed it had to do with cycle shapes!) Here is the analysis that we have been working with for the past while:  

The shapes of the 18-month cycle: in Chart 1 I have marked with different colors the shapes of the current and last two 18-month cycles. The first (white) cycle was bullish as would be expected when rising out of a 54-month cycle trough. The second (blue) cycle was less bullish, as expected.  
The current (yellow) cycle is the problem: according to this analysis it is expected to be less bullish than the previous cycle, and it isn’t. Now one might argue that the markets are not perfect, and that given the decline in the value of the US Dollar recently it is only natural that the cycles are being distorted. That is true, and might turn out to be the answer, but there is another possibility: that the US markets are responding to a six-year harmonic echo of a cycle. I presented this concept originally over a year ago, and have mentioned it occasionally since then (see the ST Outlook for 14 April 2012 and the ST Outlook for 11 August 2012).  

The six-year cycle is not a part of Hurst’s original nominal model, and many Hurst purists will have reservations about it, but I believe that it is an harmonic echo (4 x 18-month cycles resonating with 1/3rd of an 18-year cycle). Here is an updated look at this analysis: 

The 54-month cycle trough in October 2011: This analysis expects the current 18-month cycle to be bullish in shape because of the effect of the longer cycles. I have drawn arrows on the chart showing that effect. It is the strong bullish impetus of the 54-month cycle that might be giving the current 18-month cycle its bullish shape. Which of these two analyses is the right one?  At the moment it is too early to tell, but before you throw your arms up in despair at the complexities of cyclic analysis let me remind you of something very important: the difference in implication between these analyses is a matter of degree of price move, and subtleties in the developing cycle shape (earlier or later peaks, relatively higher or lower troughs). Both analyses have the same short and medium term implications, and both analyses interpret the current upwards move as approaching a peak before a fall into a 20-week cycle trough.The only difference between them is how far that bounce is expected to carry, and whether the impending peak will occur earlier or later. Chart 3 and Chart 4 are close up views of both analyses: Those white arrows show the expected downward move into the 20-week nest-of-lows. Note that both analyses expect a peak to form in the market, which is why I continue to expect the same.