Presentation on theme: "INVESTING ACCORDING TO J.M. HURST – BEGINNING WITH CYCLES Presented for the Market Technicians Association on 12/21/2009 By Debra Stotler, CMT, CFPtm Senior."— Presentation transcript:
INVESTING ACCORDING TO J.M. HURST – BEGINNING WITH CYCLES Presented for the Market Technicians Association on 12/21/2009 By Debra Stotler, CMT, CFPtm Senior Vice President, Investments Moors & Cabot, Inc. Boston, MA
Who was J.M.Hurst? Physics and Math major educated at Kansas State, Brown University and Washington Universities For 25 + years he worked for the aerospace industry. His first treatise on Wave Theory of Price Action is …
“We must measure success in investing in terms of profit per unit time over the entire time of investment activity. “ p22 To make money in the market you need EFFORT KNOWLEDGE PSYCHOLOGICAL BARRIERS For Hurst, the bottom line is timing. We want to make the most dollars in the least time. That is the measure of success. Accurate timing permits short term trading which amplifies compounding – the magic. Trading brings profit compounding into play. A function! Harmonics!
Hurst’s Price Motion Model 1-4 have nothing to do with transaction timing. 5. 23 % of all price motion is oscillatory. Oscillatory =cyclical 6-10 give the principals of cycles such as –Summation –Nominality –Commonality –Period, Amplitude, and so on.
Hurst was a Logical Thinker Very little randomness in Price movement Fundamentals do enter in, but not in the way fundamentalists view it-more unexpectedly. Follow wave functions Same wave functions as in nature
Of Note: Vibration Analysis – linear math Same wave function in stocks, commodities, warrants, etc. on any and all exchanges As in weather data, tree rings, etc (Dewey tracked them) Periodic forcing function Fourier Series and Harmonic Analysis
Predicting the Future Step 1. Determine the status of cyclicity at any given time. EG. Look at the S&P 500 for 4 years. Plot the cycles. Put an envelope around the data. addition of constant width envelopes brings out and stresses the cyclic price-time relationships on the chart. for the S&P 500, 26 is the nominal duration, or 21.428 weeks (+or-) 3.5 week cycles.
Predicting the Future How to construct curvilinear envelopes (ch4) 1. construct a weekly hi-lo chart long enough to include 1.5 cycles of the periodicity that is next longer in duration than second longer duration component in your data. Usually: 13 or 26 week (nominal) periodicity of the model or some variation will be visible.
How to Construct Curvilinear Envelopes cont. 1. (cont) Sketch the upper and lower bounds to this band. Measure the channel height vertically at several points. Choose an average of these and correct your embryonic envelope to constancy of width. If the data points cannot be included in this channel, widen the envelope until all price motion is accounted for. 2.Now repeat the process … 3.Erase the wider of the 2 envelopes. Final envelope will allow you to make more accurate estimate of the duration of the dominant periodicity by clearly demarking locations of highs and lows, free from distortion caused by the fluctuations of shorter duration. 4.Now look within the envelope you’ve drawn. Find low points and high points that touch or come close… 5.Go back to your original channel. You should have at least 2 highs and 2 lows of the dominant component. Pp 70-71.
Constructing the Dominant Channel Find the average duration. In our chart that is 12 weeks. Remember we want minimum envelope width, so some lines will be outside. Quite often a compromise is necessary. In our chart, we know that the trend of prices is down for the immediate future. We don’t know how far down or for how long the trend will remain downward. We only know that we do not want to buy the stock right now. But we do know that we are about 9 weeks in to the 12 week periodicity.
Finding the Outer Envelope We then use the same construction techniques to draw a second channel shown on the next chart. We see a periodicity of 65 weeks! We also notice that our rounded bottom is going up, and our rounded top is going down. We also know that we are roughly 62 weeks in to the 65 week periodicity.
Periodic forcing function is by definition a function F(t) for which F(t)=F(t+T) where T is the period of the function F. Therefore, if T is a period of F(t), then this also a period, where n is any given integer. T is known as the fundamental period or period. Separate individual wave components from past price data used to estimate the periods and phases of these waves. Find the wave trough.
12/17/09 nesting We would draw several envelopes to get to where we have substantial nesting, and a dominant cycle
We would look at enough data to discover that we have roughly three more weeks of a downward price movement
So, we have 3 weeks to go in the first chart and 3 weeks to go in the second. We have two or more channels that nest at major troughs. To quote Hurst: OUR INTEREST STIRS! p75
How much farther is a given wave and its associated trend likely to drive prices before that wave forms its next trough or crest?
Remember Hurst uses math to come up with these numbers.
Set Up Price Turn Predictions Let’s first extend our envelopes. The outer envelope should be extended at the same rate of curvature. Once we nest the channel, we then look for the magnitudes and wavelength. You need to know the function of the graph. The more channels you have, the more accurate your prediction.. Wave troughs tend to form in groups called nests of lows. Wave modulation : 3 or more ideal waves having certain specified interrelationships are summed, a special modification of a single ideal wave is produced.
We know that this last downtrend is steeper than the one before. Again, the math will show us what to expect, and where in three weeks the bottom will be approximately, as it starts to round up. SteeperSteeper
What do we know so far? The stock should be bought, not sold. In about three weeks we should be able to get in at a good price. After that, we should expect an increase in price for about 33 weeks, half of the periodicity of 65 weeks (+/-). But, is this what the stock will actually do? Well, you’ve got a few weeks, so why not check out the fundamentals? (Real fundamental forces for Hurst are unexpected turns of events.)
Envelope analysis is not enough Now we add a little more math to our math. Hurst tells us to find the trend lines, or more importantly, the valid trend line. A valid trend line is drawn by rules derived from wave theory. How do we recognize the valid trend line? (Logical argument) 1.Several trend lines can be in force at the same time in the same stock. 2.These are simply straightened-out segments of curvilinear channels, several of which always exist simultaneously. 3.Those lines enclosing shorter duration cyclic components move both upward and downward more steeply than those enclosing longer duration periodicities. 4.Therefore, the straightened-out segments that we know as “trend lines” become increasingly steep as the component duration enclosed within the associated channel shortens. p78
Remember, with Hurst there is always math involved.
F(x)=mx+b is the normal function of the graph. Eg. F(x)=2x+1. starting from +1 increasing in 2x with x being time. Cosine or sine equations Find the function of the graph
Each such component has a real or theoretical channel which can enclose it. Each such channel has an associated downtrend line Each such downtrend line gets steeper as component duration diminishes The valid downtrend line is the steepest one formed which leads into the time period in which a multiplicity of cyclic lows is expected! recap
Note the triangle Let’s assume we did the math and found the cycle will come to an trough at the bottom half of the circle. We now have an estimate as to where the low will be.
Notice in the daily chart of GLD that we see an even steeper down trendline in the movement of the cycle. Note the bottom half of the purple circle. We want to look at the valid trend lines as they fall within the area of the cyclic low
The valid downtrend line is the steepest one formed which leads into the time period in which a multiplicity of cyclic lows is expected! We are trying to get a more exact low price point at which to buy our stock Edge band Mid band
Edge Band Transaction Timing Superimpose the weekly chart envelopes onto the daily chart Note the “spread of uncertainty” over time and price Center lines in this area represent a time & price target Time is the region of interest Mid Band Transaction Timing - We will wait AFTER the “edge band” buy point until a slightly longer duration because cyclicity causes prices to pause. Remember our trading philosophy: it is the compounding effect that produces profits more quickly than any other single factor.
We find the plotting points for the next dip, and then we find along the trend line where it actually dips on the weekly chart.
Hurst would like to see a triangle form at the end of the downward price movement. The Triangle is of course a nice trine in geometry and astrology (for those who believe), beautiful offbeats in music, the integrated products of three spherical harmonics,etc. If you are interested, notice the value of “three” in Gann as well.
Another of Hurst’s Valuable Methods is Half-Span Moving Averages Valuable information is available each time a moving average with span equal to one- half the duration of the trading cycle changes direction. Never rely on this alone. (+/-10%) Hurst does give mathematical instructions on how to construct and use them
Here’s What We’ve Learned Hand draw as many cycle patterns on your chart as you can (at least 4) Envelope each cycle pattern Superimpose the longer time chart (weekly) onto the shorter (daily) Find the dominant cycle (notice the nests) Note how long until the next trough (or crest) Plot the chart out farther Mathematically find the area where the next trough or crest will develop Find the valid trend line Note the edge band and mid band area where the trend line rests Wait for the midband Wait for the triangle Place your trade
And of course, Hurst has several chapters on when to close or change your position!
Hurst is one man with one theory on investing. He encourages us to incorporate his method along with many others. I hope you find him interesting enough to learn more about him and what he thought about the market.