J.M. Hurst’s Cyclic Theory
In the 1970’s an American engineer called JM Hurst published a theory
about why financial markets move in the way they do. The theory was the
result of many years of research on powerful mainframe computers, and
it became known as Hurst’s Cyclic Theory. Hurst claimed a 90% success
rate trading on the basis of his theory, and yet the theory has remained
largely undiscovered and often misunderstood (more [HERE]).
54 Month Cycle = 3 x 18 Month Cycle = 6 x 40 Week Cycle (9 Month Cycle) = 12 x 20 Week Cycle
= 24 x 80 Day Cycle = 48 x 40 Day Cycle = 96 x 20 Day Cycle = 192 x 10 Day Cycle = 384 x 5 Day Cycle
Hurst published two seminal works: a book called The Profit Magic of Stock Transaction Timing, followed a few years later by a workshop-style course which was called the Cyclitec Cycles Course (now available as JM Hurst’s Cycles Course).
Nominal Cycles vs Average Cycles or Wavelengths.
Instead of an infinite variety of individual cycles in price history, there seems to be a specific set of cycles. These cycles exhibit the characteristics discussed earlier but are distinct from one another. Hurst referred to this as the Nominal Model.
- The longest cycle identified in this model spans 54 years, followed by an 18-year cycle, and the shortest at this level is 9 years. For Hurst's cycle analysis, these are considered very long-term trends.
- On a monthly scale, the 9-year cycle breaks down into two 54-month cycles, which further split into three 18-month cycles (often referred to as 80 weeks), and then into two nine-month cycles.
- The nine-month cycle corresponds to a 40-week cycle, consisting of two 20-week cycles that further divide into two 10-week cycles.
- The 10-week cycle is represented as an 80-day cycle on daily charts, which breaks down into 40-day, 20-day, and 10-day cycles.
- Additionally, cycles exist that are longer than 54 years and shorter than 10 days.
Note
that e.g. a so called 20-day cycle low can occur several days before or
after the expected 20 days from the previous low, which may also have
occurred several days outside its ideal timeframe. The 20-day cycle,
based on spectral or other analyses, might actually be 19.2 days or 20.4
days. Consequently, cycle periods are indefinite and carry a margin of
error. For investment purposes, this means all cycles should be regarded
as guides. Even the well-established seasonal cycle has actual high and
low dates that can vary significantly from year to year.
An intriguing aspect of cycles, first noted by Hurst in market data, is that they often have period lengths that are multiples of two or three, either longer or shorter than the subsequent cycles. For instance, a 20-day cycle might suggest the presence of another longer cycle lasting either 40 or 60 days, as well as a shorter cycle of 7 or 10 days. The longer cycle would be either two or three times the observed cycle, while the shorter cycle would be one-third or one-half of it. This observation proves useful when identifying a specific cycle, as it directs the analyst to the relevant intervals for both longer and shorter cycles. Hurst contends that a ratio of two is more common, whereas others, like Tony Plummer (2003), have proposed that three is the appropriate multiple.
An intriguing aspect of cycles, first noted by Hurst in market data, is that they often have period lengths that are multiples of two or three, either longer or shorter than the subsequent cycles. For instance, a 20-day cycle might suggest the presence of another longer cycle lasting either 40 or 60 days, as well as a shorter cycle of 7 or 10 days. The longer cycle would be either two or three times the observed cycle, while the shorter cycle would be one-third or one-half of it. This observation proves useful when identifying a specific cycle, as it directs the analyst to the relevant intervals for both longer and shorter cycles. Hurst contends that a ratio of two is more common, whereas others, like Tony Plummer (2003), have proposed that three is the appropriate multiple.
Note: Hurst's average wavelengths can contract and expand significantly.
Hurst’s Nominal Model is based on calendar time and not trading time, which presents a slight problem for anyone using a trading platform set up only to show trading days, which of course means pretty much everyone. The following conversion therefore needs to be made at the daily level:
- There are roughly 250 trading days in a 365-day calendar year. To convert calendar days to trading days, therefore, multiply by 0.7 (250/365).
- Conversely, to convert trading days into calendar days, divide by 0.7 (multiply by 1.42).
- Thus, the nominal 80-day cycle is 80 x 0.7, or 56 trading days.
- The nominal 40-day cycle is 40 x 0.7, or 28 trading days.
- The nominal 20-day cycle is 20 x 0.7, or 14 trading days, and so on.
These numbers should be familiar to most technicians as the basis for the popular 55-day moving average; the 26-day standard setting for MACD; and the 14-day default settings for RSI, DMI and Stochastics.
There are a number of very enthusiastic advocates, prominent traders
and writers who proclaim Hurst as the “father of cyclic analysis” and
confirm the efficacy of the theory (including the late Brian Millard who
wrote several books about Hurst’s theory), but why is it that the
theory isn’t better known and more widely used by technical analysts?
There are two reasons:
- Firstly, Hurst’s Cyclic Theory is not “easy”. While it is beautifully simple and elegant in its essence, it is not a simple theory to understand or to apply. The Cycles Course is over 1,500 pages long, and most people take several months to work through it.
- Secondly, although the theory presented in both the Profit Magic book and the Cycles Course is the same, there is a vitally important distinction between the analysis processes presented in the two. Hurst claimed his success on the basis of the process presented in the Cycles Course, whereas many people read the Profit Magic book and go no further, with the consequence that they never discover the more effective process presented in the Cycles Course.
Hurst defined eight principles which like the axioms of a mathematical theory provide the definition of his cyclic theory. The eight Principles of Hurst’s Cyclic Theory are:
- The Principle of Commonality – All equity (or forex or commodity) price movements have many elements in common (in other words similar classes of tradable instruments have price movements with much in common)
- The Principle of Cyclicality – Price movements consist of a combination of specific waves and therefore exhibit cyclic characteristics.
- The Principle of Summation – Price waves which combine to produce the price movement do so by a process of simple addition.
- The Principle of Harmonicity – The wavelengths of neighbouring waves in the collection of cycles contributing to price movement are related by a small integer value.
- The Principle of Synchronicity – Waves in price movement are phased so as to cause simultaneous troughs wherever possible
- The Principle of Proportionality – Waves in price movement have an amplitude that is proportional to their wavelength.
- The Principle of Nominality – A specific, nominal collection of harmonically related waves is common to all price movements.
- The Principle of Variation – The previous four principles represent strong tendencies, from which variation is to be expected.
In essence these principles define a theory which describes the
movement of a financial market as the combination of an infinite number
of “cycles”. These cycles are all harmonically related to one another
(their wavelengths are related by small integer values) and their
troughs are synchronised where possible, as opposed to their peaks. The
principles define exactly how cycles combine to produce a resultant
price movement (with an allowance for some randomness and fundamental
interaction).
These eight simple rules distinguish Hurst’s theory from any other
cyclic theory. For instance most cyclic theories consider cycles in
isolation from each other, and cycles are often seem to “disappear”. By
contrast cycles never disappear according to Hurst’s theory, but they
may be less apparent because of the way in which cycles combine.
It is
the fact that Hurst’s theory stipulates that there are an infinite
number of cycles that makes it particularly different, and also begins
to explain why it is impossible to forecast price movement with 100%
accuracy. Just as it is impossible to conceive of the sum of two
infinite numbers, it is impossible to define the result of combining an
infinite number of cycles.
The 9-Month Cycle
The most important cycle in market analysis is the 9-Month Cycle, which is also known as the 40-Week Cycle, 39-Week Cycle, or 8.6-Month Cycle. Many traders and analysts utilize this cycle, as it is critical for intermediate-term market forecasting. It aids in planning for and identifying significant declines and rallies throughout the year. Even short-term traders should monitor the 9-Month Cycle to align with the broader trend.
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The structure of the 9-Month Cycle consists of two 20-Week Cycles, referred to as "Phase 1" and "Phase 2." Each 20-Week Cycle is further divided into a Phase 1 and Phase 2 10-Week Cycle.
Typically, the most powerful rally within the 9-Month Cycle occurs during the first three months, as all three nesting cycles align for an upward movement. Conversely, the market is most vulnerable to significant declines during the last three months of the cycle when all three cycles trend downward.
In a bull market, the crest of the 9-Month Cycle generally occurs between the sixth and eighth month (right translation), while in a bear market, it is expected in the second or third month (left translation).
In addition to the crest of the 9-Month Cycle, the completion of the Phase 1 20-Week Cycle is another significant event. In a bull market, this may result in a minor price correction or consolidation, whereas in a bear market, it likely coincides with the crest of the 9-Month Cycle.
Understanding the basic structure of the 9-Month Cycle indicates that the least risk for establishing new long positions occurs during the first three months, while the greatest risk of decline arises in the last three months. The middle three months require caution, as the Phase 1 20-Week Cycle may roll over into a trough, presenting both risks and opportunities with the onset of the Phase 2 20-Week Cycle.
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The structure of the 9-Month Cycle consists of two 20-Week Cycles, referred to as "Phase 1" and "Phase 2." Each 20-Week Cycle is further divided into a Phase 1 and Phase 2 10-Week Cycle.
Typically, the most powerful rally within the 9-Month Cycle occurs during the first three months, as all three nesting cycles align for an upward movement. Conversely, the market is most vulnerable to significant declines during the last three months of the cycle when all three cycles trend downward.
In a bull market, the crest of the 9-Month Cycle generally occurs between the sixth and eighth month (right translation), while in a bear market, it is expected in the second or third month (left translation).
In addition to the crest of the 9-Month Cycle, the completion of the Phase 1 20-Week Cycle is another significant event. In a bull market, this may result in a minor price correction or consolidation, whereas in a bear market, it likely coincides with the crest of the 9-Month Cycle.
Understanding the basic structure of the 9-Month Cycle indicates that the least risk for establishing new long positions occurs during the first three months, while the greatest risk of decline arises in the last three months. The middle three months require caution, as the Phase 1 20-Week Cycle may roll over into a trough, presenting both risks and opportunities with the onset of the Phase 2 20-Week Cycle.
