The Hurst Trader

The shape of MTN’s price movement looks fairly familiar … like the rest of the SA stock market, it’s been going UP a lot! It reached a peak as recently as May this year. Since then the price has been falling fairly rapidly.

The software is choosing to position the 54-month trough back in August last year, which I think is fairly questionable, however as I have mentioned in other posts, the positioning of the 54-month trough is a tricky business (because it relies on evidence gathered from the 9 year cycle – of which there is very little in the 15 years of data available – about 1 and a 1/2 cycles to be exact). However whether or not the 54-month trough is positioned correctly, there can be little doubt that we are due for a 40-week strong trough as indicated by the inverse gray pyramid to the right of the chart. Notice also the column of question marks positioned on the 3rd of July – the software identifies that day as the expected nest-of-lows, but it is too recent for there to be enough corroborating evidence to firmly declare that as the trough. Price is in the BUY zone (in fact it is pretty late in the buy zone), and the software is forecasting a rise to over 17000. Of course if the positioning of the 54-month trough is incorrect, that will affect the cyclic model the software has built, and will change that forecast to some extent. But the worst that can happen is that the forecast will be lowered and the price will not be as extensive as forecast now. As the price unfolds the software should detect this change, rebuild its cyclic model accordingly, and exit from the trade at a lower price than originally forecast, but likely still at a profit. Time will tell … which is why we’re testing the software in this way!

Looking in more detail at the price movement – the 20 day FLD high is at 12720 1 day ahead (the 17th of July). If price crosses this level, that would confirm that we have seen the trough of the 40-day cycle, which by the Principle of Harmonicity implies the expected nest-of-lows occurred on the 3rd of July.

The buy situation reveals that an entry into a long trade at 12720 would have a Potential:Risk ratio of over 2 (which is acceptable), and a gross% return of over 280%, assuming one purchased margined Single Stock Futures in MTN. The annualized percentage is an exorbitant 1460%.

However, I must emphasize that I present this analysis in the spirit of testing the software – given the reservations expressed earlier about the positioning of the 54-month trough, this trade must be considered too high risk at the moment. As soon as the software’s Cyclic Model Rating feature is complete I will be able to judge the degree of risk, but that will have to wait a week or two.

Please note that this is a discussion of the cyclic analysis performed by Thinking Trading Software. It is NOT a recommendation of a trade. All articles and comments on this website are presented as a discussion of the efficacy of the software to analyze the cyclic movement of stock market prices. I am doing this to create a record of analysis by the software over time. DO NOT consider this to be trading advice or recommendation. I am not qualified to offer trading advice … I merely offer this information as a commentary on the software.

As I build this website I am gradually adding to the glossary, which explains some of the more technical terms. If there’s something that confuses you, that hasn’t made it into the glossary, or if you are interested in this sort of analysis, and would like to discuss it, or would like me to consider a particular share of interest to you, please let me know by adding a comment to this post, or by email: david@sentientcode.com.

Last week I said in an analysis of the ALSI:

I expect that next week I’m going to be standing-by to identify the 20-week trough.

Well, I am standing by – the market has fallen a little more, and yesterday price fell right into the middle of the BUY zone. I’m not going to say “now the market will turn”, because that would be premature, but according to the analysis (shown below) the turn is near … the 20-day FLD high action signal is at 26400, so an extremely aggressive approach would be to go long at that level, however a more balanced and conservative approach would be to wait for the first 10 or 20 day cycle trough after the upcoming 20-week trough before doing anything. The only reason to feel aggressive is that several other shares on the JSE are giving buy signals, so there is a chance that the tide is turning.

Standard Bank’s share price has taken a bit of a hammering since October 2007. Here is an overview of the last 13 or so years:

I have included the software’s phasing along the bottom of the chart – where (if your eyes are particularly sharp!) you might be able to see that the 54-month (4 1/2 year) cycle is identified as having formed troughs in 1998, and 2003. The software is predicting that the next 54-month trough is overdue, so we should be expecting a fairly dramatic turn up. Here is the last 18-month cycle, as phased by the software (which in fact spans about 2 years, thanks to the Principle of Variation):

Notice at the right side of the chart, the inverse pyramid of gray-shaded phasing bubbles. This is how the software presents the fact that a large nest-of-lows is expected. Now see if you can spot the vertical column of question marks on top of the gray pyramid. This indicates that the software thinks that the expected nest-of-lows has already occurred, on the 3rd of July. Why question marks, and not phasing diamonds? Because there is not yet enough evidence that the trough (which is a really big one) has really occurred. However if you look at the chart below, showing the buy and sell zones, you can see that price is already well into the BUY zone, and so it seems highly likely that this share is ready to turn up. The target for the upward movement is around 11500.

Looking in even more detail at the last 2 1/2 months: a break of the 20 day Valid Trend Line would confirm that the recent trough (of 3rd July) is a trough of at least 40 day strength. This is good enough, considering the extended nature of all cycles at this point to confirm that this is the trough of 54-month strength. Note that 54-month troughs are hard to pin-point exactly given the few cycles of one greater degree (the 9 year cycle) present in the available data, and so I am reluctant to be dogmatic about the 54-month strength of this nest-of-lows, however it is at least an 18-month nest-of-lows. The 20 day VTL is passing through 7735 today (1 day after the end of data), and so a potential entry point could be set at 7750, or to be safer one could use the last 10-day cycle peak of 7889, implying a potential entry price of about 7900.

Here is the Potential:Risk evaluation of the situation: you will see that an entry of 7900 gives us an extremely promising PR ratio of over 4, and an expected gross% return of over 40%, which annualized is about 180% – and this is not considering a margined, or single stock future trade. All-in-all the software is indicating that Standard Bank is in a position to turn around.

Please note that this is a discussion of the cyclic analysis performed by Thinking Trading Software on the share price of Standard Bank. It is NOT a recommendation of a trade. All articles and comments on this website are presented as a discussion of the efficacy of the software to analyze the cyclic movement of stock market prices. I am doing this to create a record of analysis by the software over time. DO NOT consider this to be trading advice or recommendation. I am not qualified to offer trading advice … I merely offer this information as a commentary on the software.

As I build this website I am gradually adding to the glossary, which explains some of the more technical terms. If there’s something that confuses you, that hasn’t made it into the glossary, or if you are interested in this sort of analysis, and would like to discuss it, or would like me to consider a particular share of interest to you, please let me know by adding a comment to this post, or by email: david@sentientcode.com.

The South African market is represented by the All-Share Index, or ALSI in much the same way as the US market is represented by the S&P 500, and by the DJIA (Dow Jones Industrial Average). I have been keeping an eye on things with my TT software, and thought I would offer up some thoughts, and invite some discussion about the SA market and where it’s going.

The Big Picture

As this chart shows, the SA market has been in the grip of a roaring bull for the past 5 years. In fact it shows signs of being a pseudotrend, but that will have to be a discussion for another time (a pseudotrend is a strong move that is bolstered by fundamental interaction – in this case I suspect the Rand/Dollar exchange rate might have a lot to do with it). Things started to falter in October last year, but recovered from January to May this year (see this post). Since then it’s been tumbling. While we’re looking at the big picture – the 54 month (4 1/2 year) cycle is fairly clearly discernable, with a trough in late 1998, and another in mid 2003. (I haven’t shown the cycle phasing on this graph because by the time I scale the picture down for the web, the phasing is little more than a smudge). It is possible that the trough of January this year was another trough of this cycle, but the software chooses instead to say that trough still lies ahead of us, and indicates that the cycle (due to the Principle of Variation) is currently running long at 61.3 months). Time will tell whether this is in fact correct. If it is we could be in for some tumultuous downside action (the move down to the trough of a longterm cycle is often fairly dramatic). If it is not correct, and the cycle did form a trough in January this year then we should instead see some good upward action!

How does the software deal with this “alternative” scenario? It’s early days yet, but as time passes and it re-evaluates the phasing analysis, it should be alert to changes in the underlying trends of cycles. Time will tell, but that’s what this website is all about …

Software Prediction

Bottom line – the software indicates that the market is coming down into a 20-week nest-of-lows, expected anytime from about yesterday to about 3 weeks from now. Notice the 10 day and 5 day cycles are both overdue, but this is not a reason to say the market “isn’t turning yet” – coming into a big nest-of-lows the shorter cycles are often completely squashed by the heavy pressure of the longer term cycles, so we might not see any clear 5 or 10 day troughs before the big 20-week trough. From here the software is predicting a move up – all the way up to about 34000, which is interesting because if the market really is this late in the 61 month cycle, we shouldn’t be seeing another higher peak – however the software does include Sigma L (the sum of all cycles longer than the software can determine, which includes all possible pseudotrend), and so it is possible. It will be interesting to see if the market really does get up there. The lower level of the target zone is about 32000, which itself would be a higher peak.

The Recent Past

Now looking in much more detail at the move down since the end of May. There are 5 points of interest that I’ve highlighted:

• Price is currently at the mid-channel-pause level of the 18-month cycle, indicated by the fact that price is almost touching the 18-month FLD (the very thin yellow line which can be seen best to the left of the green BUY zone box). Price could cross this line without it having much significance, but it does indicate that price has reached a mid-channel reversal point.
• Price has come right down to touch the 18 month VTL. This fact isn’t greatly significant of itself – but if price manages to stay above the VTL, it is an indication that we haven’t yet seen the 54-month peak – so the chances are better of us getting a higher high (as the target mentioned above suggests). If price crosses below this VTL decidedly, then that would indicate that we have seen the peak of the 54-month cycle, and the chances of the market reaching a higher high are smaller. It wouldn’t remove the chance of there being an upward move at this point, but it would LOWER the target somewhat. Of course the 18-month VTL would be in a different place if the “alternate” mentioned above was true – that we have seen the 54-month trough back in January.
• The 20-week nest-of-lows is due now as mentioned earlier. Note that if the phasing analysis is not quite correct, this could in fact be a stronger nest-of-lows than 20-weeks – which doesn’t change our outlook, it’s really just an interesting point.
• Action signals are well above price. The action signals I’m talking about here are the signals that would indicate that the nest-of-lows has occurred (yesterday for instance). The shortest action signal that would have any meaning at the moment is the 20-day cycle VTL or FLD. Both are well above price, so I would certainly not be about to start buying just yet. But next week the 20-day FLD drops fairly sharply, and I expect that next week I’m going to be standing-by to identify the 20-week trough.

Another small point of interest: Elliott wave fans might be able to count a fairly clear a-b-c 3-wave correction, which is an indication of how Elliott and cyclic analysis although taking slightly different approaches often indicate the same results.

As I build this website I am gradually adding to the glossary, which explains some of the more technical terms. If there’s something that confuses you, that hasn’t made it into the glossary, or if you are interested in this sort of analysis, and would like to discuss it, or would like me to consider a particular share of interest to you, please let me know by adding a comment to this post, or by email: david@sentientcode.com.

Detailed summary of the ALSI trade presented on the home page:

The software indicates that the 46.1 week cycle formed a trough a week ago, on the 22nd of January. This is the nominal 9 month cycle, so we can now expect 2 x 20-week cycles, with the peak of the next 9-month cycle most likely occurring in the FIRST of these sub-cycles because the short-term underlying trend of the 9 month cycle is DOWN (18-month turning down, 54-month down). This is therefore a good time to buy as we expect a 9-month magnitude peak within the next 20 weeks (the software targets the 25th of April). The target for a long trade is given as 30500 (the middle of the red sell-zone on the chart), and the expected exit date for the trade is between mid-April and late-May. The stoploss level is set a small distance below the most recent low (of 21932) at 21750. Between here and the target there are two Pause Zones (the sandy coloured background boxes), so the price is likely to pause in those areas on its way to the target. There are several FLD’s in cascade position, which will project price upwards.

This gives us the following buy situation, which indicates a Potential to Risk ratio of 2 at a price of 24666. I would prefer a higher PR ratio (of 3 – 3 1/2), but given the high confidence rating of the phasing at this point (not shown), and the extreme nature of the recent trough indicating probable fundamental interaction on the day of 22nd January – which is a typical “panic bottom” occurrence – also called a spike, or key-reversal day, (note that day’s candle’s long lower tail, or shadow) – I will go ahead with the trade, particularly as the gross% profit to be made is very satisfactory at over 300%.

The thing now is to find an entry action signal. Given the high confidence rating of the cycle phasing, I look for an action signal that would confirm the recent nest-of-lows. A 10 day VTL has already occurred – Friday last week, which increases my confidence, however a longer cycle confirmation would be better. Given that the recent 20-day troughs have been well-spaced, a 20-day confirmation would be good enough – but the 20-day VTL is too high to provide an effective entry, and so I choose the 20-day FLD, and use the FLD high as opposed to the FLD median because the high gives me an instant action signal (in fact the difference between the two is not great at this point, and the entry level is not much changed by this decision). The 20-day FLD high was at 24000 today, below yesterday’s high of 24195 – and so I choose 24200 as an entry level (requiring that price exceed yesterday’s high). Referring back to the buy situation table, this gives a PR ratio of about 2 1/2. I’ve highlighted the 20-day FLD high in yellow in the chart below (I know there are lots of lines and colours … it confuses me too!)

In fact the entry occurs fairly near the high of the day, and the trading for the day closes slightly below my entry, but there is no cause for alarm!

The trade progresses very well, with all the cyclic events falling into place as expected, including a pause/correction in the pause zone identified between 26000 and 27000 – which because it was expected gave no cause for alarm. We’ll jump forward now to the 28th of May. The software two days ago identified the peak of the 20-week cycle (which is the cycle we are trading) as having occurred on the 22nd of May. It is now projecting DOWN to a new target somewhere below 27000.

If we had exited at our original target of 30500 (assuming that no better-than-expected signal had been received), then our exit would have been effected on the 14th of May, however assuming that we canceled that exit (ignoring the software, and hoping for more upside), an action signal at the crossing of the 80-day VTL (confirming the 20-week peak) would have taken us out on the 28th of May at 30200.

This trade would have been a profitable one:

Margin Deposit: R18,000
Total Profit: R60,000
Brokerage fees: R800 (possibly greater depending on your broker, and their roll-over fees – there would have been one roll-over)
Duration: 120 days
% Profit: 328% (in 120 days)

As I build this website I am gradually adding to the glossary, which explains some of the more technical terms. If there’s something that confuses you, that hasn’t made it into the glossary, or if you are interested in this sort of analysis, and would like to discuss it, or would like me to consider a particular share of interest to you, please let me know by adding a comment to this post, or by email: david@sentientcode.com.

I keep writing all sorts of nonsense on this blog, but the one thing I haven’t got to yet is what the software is doing right now. That’s because I’ve thought I needed to prepare the ground, explain things, describe the trading theory at length … but instead I’m just going to take the plunge. Pictures say it all:

This is a chart of the Euro-USD exchange rate, produced by the software, analysing data up to Friday 30th May 2008.

• The thick BLUE line is the “price” line – the exchange rate between the two currencies.
• To the right you will see the price scale, with the closing price of Friday 30th May highlighted in a red box – it is red because the price has FALLEN (is lower) from the previous day’s closing price.
• The thin multi-coloured lines are the lines Hurst calls FLD’s – Future Lines of Demarcation.
• Price is surrounded by a “dominant channel”  the purple dotted lines that form an envelope around the price movement.
• Along the bottom of the chart is the last part of the phasing analysis for this chart. To the right you will see the cluster of small circles within lines, with a grey shaded background. This indicates that we expect a nest-of-lows within the next 7-10 days, with a strength of about 20 weeks.
• You will also see some VTL’s – Valid Trend Lines, as defined by Hurst. These are the straight dotted lines, with small boxed labels giving the wave period of the VTL.
• Notice also the TRIO of moving averages, moving around the price line. One is dark red, one blue and one green. These lines are not Hurst-inspired, but are a personal refinement by which I calculate refined FLD projections.

I’m not going to explain at length what this chart means because that would take several pages of discussion. For now I just wanted to give a glimpse of what the software is doing. Having said that, here is the commentary generated by the software, which pretty much does that for me:

Updated Phasing Analysis reveals that the dominant cycle has a wavelength of 16.9w, or 118 days. This is assumed to be the 20w nominal wave, which implies that all waves will be (-14%) shorter than nominal. This cycle is approaching a TROUGH (and a medium degree nest-of-lows). The underlying trend to this cycle is currently FLAT, likely turning DOWN. The future FLD indicates that this cycle will influence prices to peak in a short while, and then to fall.

The sub-dominant cycle (next wave down from the dominant cycle) has a wavelength of 58.9d, or 59 days. This is assumed to be the 80d nominal wave. This cycle is overdue for a PEAK. This is probably the second of 2 sub-waves. The underlying trend to this cycle is currently FLAT, likely turning UP. The future FLD indicates that this cycle will influence prices to peak soon, and then fall.

The pre-dominant cycle (next wave up from the dominant cycle) has a wavelength of 33.9w, or 237 days. This is assumed to be the 40w nominal wave. This cycle is approaching a PEAK. The underlying trend to this cycle is currently strongly UP. The future FLD indicates that this cycle will influence prices very little because despite near-term volatility the FLD becomes range-bound.

Σ L is currently FLAT. (value of: 0.0)

The last phasing analysis was 4 days ago. In that time price has FALLEN by 244 to 15521.
Sequence #1 of the previous pattern: Price did move DOWN (for 3 days) as expected and has moved towards the target of 14954. The closest price has gotten to this target so far is 15394 (2.9% short) 1 day ago. This target is now 38 days away.
This brings the price movement up to date. From this point on:
Sequence #1 is expected to reach a LOWER target of 14808(-146 diff) 4 days EARLIER, on 2008/06/12 Recent price action has generated a new sequence (# 1). The target of this projection is 13624, expected by 2008/10/06.

CURRENT PROJECTION PATTERN:
Price is currently range-bound (last close 15521), in an active FLD pattern cascading down. Price crossed below the 15 day FLD 1 bar ago, implying a price fall to 15467. This move would imply a price cross below the 29 day FLD (est: 2008/06/03 & level: 15498) projecting price to a CONGESTION PAUSE ZONE at approximately level 15436  Then price is likely to CONTINUE DOWN after a pause, towards fulfilling the 16 week cycle projection of 15402  taking price into a CONGESTION PAUSE ZONE at 15431 by about 2008/06/09  Then price is likely to CONTINUE DOWN after a pause, towards fulfilling the 59 day cycle projection of 15342  taking price into a CONGESTION PAUSE ZONE at 15429 by about 2008/06/09 . This price move breaks below the 33 week VTL implying that the peak on 2008/04/23 is the expected peak of the 15 month cycle. Then price is likely to CONTINUE DOWN after a pause, towards 14866 by 2008/08/09, attempting to fulfill the projection generated by the crossing of the 58 day FLD taking price into a CONGESTION PAUSE ZONE at 15257 by about 2008/07/03 . This price move breaks below the 16 week VTL implying that the peak on 2008/04/23 is the expected peak of the 33 week cycle. Then price is likely to CONTINUE DOWN after a pause, towards 14522 by 2008/11/09, attempting to fulfill the projection generated by the crossing of the 33 week FLD taking price into a CONGESTION PAUSE ZONE at 14782 by about 2008/10/05 . This price move breaks below the 15 month VTL implying that the peak on 2008/04/23 is the expected peak of the 46 month cycle. Then price is likely to CONTINUE DOWN after a pause, towards 13572 by 2009/07/15, attempting to fulfill the projection generated by the crossing of the 15 month FLD taking price into a FINAL REVERSAL ZONE

There is no cycle which provides an average potential of at least 20% per half-cycle, and so it is not recommended that you trade this stock unless you are trading on a leveraged basis, in which case you should change the Trading Settings by using the Tools|Trade Settings|Edit menu.

Having reviewed the entire projection sequence I am unable to find a move suitable for trading, and so no trades have been set up.

 Well – that’s what the software is “thinking” about the Euro-USD as of the 30th May. It seems pretty likely that things are going down, and that the upcoming nest-of-lows will generate little more than a temporary upward correction to the downward move. However it is early days for the software, and so I am by no means making any kind of call on this, I merely put it up here to show what the software’s doing at the moment.