The jury is still out on (in my opinion) on the position of the 20-week cycle trough that I discussed last week. It seems likely to have occurred in the S&P 500 as this chart shows:
But it looks as if it still lies ahead in the DJIA:
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I have been inspired by a comment on last week’s post to consider what the situation is with regard to the much longer cycles, of 54-months and 9 years. This is a subject of much debate, and to keep things simple I am going to assume that the March 2009 trough was a trough of at least 54-month magnitude. I think that there are three viable alternates. Here is the first (shown with data for the S&P 500):
This option places the 54-month cycle trough in November of 2012, and the first 18-month cycle trough following that in February 2014. It is the option that makes the most sense to me, and the impetus of that 54-month cycle would explain the nearly straight-line upwards move we have witnessed since November of 2012. The implications of this analysis are that we are about half-way through the current 54-month cycle and are now approaching the “downward” phase of the cycle as it turns down to the next 54-month (and probably 9-year) cycle trough. Forthcoming highlights are an expected 18-month cycle trough in May 2015, and a 9-year cycle trough in mid 2016.
The second option is this (data for the Dow Jones Industrial Average):
The big difference here is the later placement of the most recent 54-month cycle trough, in October 2013. It is a less satisfying solution in my opinion, but it is possible. Interestingly this solution also expects an 18-month cycle trough in May 2015, but it would be the first 18-month trough, not the second as in the first option. Knowing to expect an 18-month cycle trough in May next year is useful, and I don’t worry too much about choosing between these two options. After that trough forms the depth of the trough should provide further clues to help us determine which of these two options is the correct one.
The third option is not strictly Hurst, and so if you are a Hurst purist this one comes with a warning! You probably know that I enjoy exploring different cycle options, and I have written several times in this blog about the potential of a 6-year cycle (or a 6-year “harmonic echo”). Here is an option that does not consider the 54-month cycle at all, but instead uses Hurst’s default nominal model up to the 18-month cycle, then assumes a 2:1 harmonic ratio with a 3-year cycle, another 2:1 harmonic ratio with a 6-year cycle, and then a 3:2 harmonic ratio with the 9-year cycle. (I know … that contravenes one of Hurst’s Cyclic Principles, but sometimes I like to bend the rules a little). The resultant analysis is this:
There are some elements of this analysis that are more satisfying than either of the first two options, in particular the clean M-shape of the 3-year cycle from March 2009 to October 2011. The analysis works well (apart from using an unconventional nominal model), and what I find particularly interesting is that it paints a very different picture for the next few years. The first highlight (if you could call it that) is that we expect a 6-year cycle trough (the longest wavelength cycle to form a trough since early 2009) in October of this year. Then in contrast to the other two analyses the longest wavelength trough expected in 2015 is only 40-weeks. Mid 2016 has a trough of only 18-month magnitude, as opposed to the 9-year magnitude trough expected at the same time in option one.
This third analysis is useful to keep at the back of mind as the market approaches its next correction, because it warns that it could be a big one. I also find it interesting because it correlates closely with what some well-respected Elliott Wave analysts are expecting, particularly in terms of a strong move down expected soon. By the end of this year we should be able to either eliminate this possibility, or adopt it with more conviction, depending upon whether we see a deep trough in October.
Note that all three options expect a trough in October this year, but the magnitude differs: either 40-week, 20-week or 6-year.
Let me know which analysis you prefer. Have a good week, and profitable trading!
