I have been spending a lot of time lately looking at the stock market, and revisiting some of the ideas that I explored a few years ago about the cycles seen in the stock market.  In fact, not just the stock market, but bonds, currencies, and most other markets exhibit an amazing degree of cyclic action.  In one way this isn’t surprising though, as all these cycles are based in human nature, which doesn’t evolve especially quick.

The studies that I’ve thrown myself into involve the work of JM Hurst (and sorry, it has been taking most of my blogging time).  Hurst’s idea were developed almost 40 years ago, and using the data available he developed 8 basic principles.  I’ll get into these in an intro to Hurst post a bit later, but they all present modifications and reasoning as to why the cycles work, how to see the underlying trend in the price action, and rules for trading this price action.

Cycles in the currency markets

Cycles in the currency markets

I used a piece of software called Sentient Trader to do all the hard work of running the cycle transformations, placing the various target zones, and setting the current state of cyclic action.  The diamonds at the bottom indicate what level of low is found, as lows nest, meaning a 40 week low is also a 20 week low, a 10 week low, and so on.  What this is showing, is that the US dollar is expected to make a low in mid-September, then rally, then fall to a final low in late December.  Since the stock market generally moves inversely to the US dollar, this means that we’d expect the stock market to rally for a few weeks, pull back, then have a final rally that would last until December – January time-frame.  As you can see here, we’re looking for a low around 22.25 3 to 4 weeks from now.

The current state of the cycles are shown here.   There are several things I like about this style of investing.  First, you can match it to your time-frame.  If you’re interested in trading several times a day or week, there are very short cycles, if you’re a buy-and-hold type of investor then maybe you’re interested in following the 4 ½ year cycle (54 month).

Cyclic status

Cyclic status

Again, these cycles exhibit themselves in many financial instruments, stocks, bonds, and foreign exchange rates.  Many Brokers let you trade stocks and options, some also let you trade bonds, and very few let you trade currencies.

If you are interested in foreign exchange trading or learning more about the cyclic nature of the stock market, I invite you to visit the the link or keep posted here as I’ll be moving into more detailed coverage of the markets and specific trades that you can follow in real time.

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5 Responses to Cycles and the markets

  1. AverageJoe says:

    As a buy and hold investor, I’ve rarely dipped my foot into these waters, but I’m always fascinated by them. One of my favorite books on investing is called Stock Market Wizards and profiles some big time traders who’ve discovered cycles that they’ve used to make tons of money. Can’t wait for more posts on this. Great to have you back, Karl!

  2. Modest Money says:

    This is something I should be paying more attention to. Half of my income is in US dollars. So I’m always trying to time favorable exchange rates when I convert it to Canadian. Knowing when those cycles should happen would be extremely beneficial. It sounds like I should exchange some rather soon in fact.

  3. Interesting. I tend to be a more buy and hold investor myself. I’ve wanted to get into more technical trading and forex for some time now, but just not have taken the time to educate myself as I would like.

  4. Tony says:

    Great post! I personally don’t use any of those programs – I prefer developing them myself.

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