Should we trade the next interaction with the 20-day FLD or not? I would like to present a novel way of answering that question.
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I started trading in South Africa. There is something exciting about trading an emerging market: it is volatile, risky, and somehow more straightforward than trading a developed country’s market. Perhaps it reflects the life in the country: everything seems more black and white, there is less subtlety, a harsher reality. In the markets I have found this results in clearer cycles, which often make it easier to understand what is happening in the markets of the US and Europe.
At the moment we are watching stock markets around the world fall into a 40-week cycle trough. The question I am asking myself is whether we are going to see a bounce out of a 40-day cycle trough soon (in the week ahead) or should we be standing by for the bounce out of the 40-week trough? Here is the situation in the S&P 500:
If you have been following these blog posts recently this analysis will be familiar to you. Here we see the 40-week cycle trough expected early March, and the 40-day cycle trough expected now. With 46 days since the 80-day cycle trough on 16 December the 40-day trough is very overdue, and must happen soon. The alternate analysis is this:
Here the 40-day cycle trough occurred on 13 January 2014, at 28 days which is early for a 40-day cycle (the average length of which is 34 days), but quite possible. This analysis implies that the 40-week cycle trough is going to occur earlier, in about the second week of February.
The problem with this uncertainty is in making trading decisions. Price interacts with the 20-day FLD (that purple line on the charts) in a particular way, and if the first analysis is correct we would want to buy when price crosses over the FLD (in what we call an E-category interaction), but if the second analysis is correct then we would not want to buy, because it would be a G-category interaction, and they very rarely result in profitable long trades. We would need to wait for that 40-week cycle trough.
Let me show you a novel way of informing the choice between these two options. Here is the South African stock market’s ALSI-40 (it is a stock index future):
You can see what I was saying earlier about the greater volatility, and more importantly the much clearer cycle shapes. This analysis also has a 20-week cycle trough on 9 October 2013, but you will notice some interesting, albeit subtle differences after that. The 80-day cycle trough is on Friday 13 December 2013, whereas in the S&P 500 the 80-day cycle trough was on the following Monday, 16 December 2013. Interestingly by the time the US markets opened on that Monday 16 December, the South African markets had only another two hours of trading, and they were well up on the day. South African traders had good reason to suspect that the 80-day cycle trough had formed, and as the US markets fell to new lows, it was not a big surprise when they turned back up again, and formed their own 80-day cycle trough. I’ll leave you to discover other interesting comparisons between the two markets.
The important point is that troughs occur at similar times in stock markets around the world (Hurst’s Principle of Commonality). And something interesting has developed in the South African market: 49 days have elapsed since the 80-day cycle trough on 13 December 2013. On Monday that will be 51 days. If the market doesn’t bounce up very soon (Monday or Tuesday at the latest) then we will have to accept the alternate analysis shown here:
OK great, so we have the same two analyses in the South African ALSI as we have in the S&P 500, what’s the point? The point is that it is very difficult to decide between the two analyses in the S&P 500. And it is not likely to get much easier because the FLD is so close to price: Monday’s FLD level is at about the level of Friday’s high, and so price is in danger of bumping into the FLD without really doing anything. But in the ALSI we have two advantages: first of all, as I’ve already pointed out, there is a tighter time limit. And secondly the FLD is a good distance clear of price. If the 40-day cycle trough is going to occur now then we should see the ALSI move up strongly and cross that FLD. The cycle shapes are very clear in the ALSI at the moment, and so it will be a good deal easier to understand what is happening and resolve our dilemma by watching the ALSI than by watching the S&P. And that (finally) is my point!
I am not suggesting that you get hold of South African stock market data, but I do believe that it is very useful to watch other markets (particularly emerging markets) to help clarify things when the analysis situation becomes a bit cloudy in the US or European markets. I will certainly be watching the SA markets closely on Monday and Tuesday for early signs of a turn (or continued fall).
Which markets do you like to watch? If you’re one of the South Africans who recently joined us on Hurst Signals then I think I know the answer!
Our launch of Hurst Signals over the past two weeks has gone very well, and many new people have joined our Hurst community. If you are interested in Hurst’s cyclic approach to the markets then Hurst Signals is the easiest way to get started. You will learn everything you need to know in the Hurst Cycles Trading Academy, and be able to ask questions and share ideas with our developing Hurst community.
I hope to see you there, and of course wish you profitable trading!
