Cycles are very powerful. When you find a price series that has a controlling dominant cycle, all one needs to do to profit from it is execute a timing method on the price series change in line with the cycle. However cycles do have an powerful signal that is a little harder to market time.
Part One: Describes the signal
Part Two: Where we expect the signal to occur next.
First we re post the chart below from our Jim Hurst method education page.
The powerful signal I refer to is when the price action inverts to the cycle (Inversions). This means that the price action is so strong it is breaking the behavioral habits of its preceding history. Or more bluntly something has changed in the price series to give it such determination to break the cycle swing. In the chart above the inversion is seen as massive price strength for the bullish side. This was caused by QE1 for the record.
A cycle inversion occurs because of two reasons:
- A new or existing very strong fundamental development in the price series that gives price action the impetus to be very strong.
- Or, of course, the cycle period is losing its correlation to the price series. This must be considered, however when the cycle is very strong and inversions are infrequent then (1) is more likely.
Consider this blog we posting : Long term interest rate cycle Bernanke doesnt want to see . We expected bonds to get stronger (interest rates higher). The cycle was perfect and fundamentals. Everything apart from the bearish distribution pattern found on the SP500 that result in a 16% sell off (August 2011) and thus caused folks to buy US Treasuries in mass. Who would have thought that will all the money Federal Reserve printing and the talk of US paper being rubbish that the world would see 10yr bond under 2%. Seriously! The truth be known we though the rise in long term bond yields would cause the SP500 sell off, it just turned out Europe woes beat the higher interest rate fundamental story to the front page first. The fun with fundamental analysis.
The SP500 sell off was the new fundamental reason that broke the cycle in the bond market. The result was a cycle inversion which resulted in a very strong move in bond prices. Hence the reason why cycle inversions on long term cycles are very powerful signals. (NOTE: Cycle inversion on short term cycles is never do dramatic, for the simple fact they are short term)
This is what happened..
We use long term Hurst cycles on bonds, commodities, stocks, currencies and metals for the smartest intermarket analysis possible. Part two we will put a case forward for the next powerful long term cycle inversion signal.
