Cycle Analysis of the Stock Prices Was Never That Simple
Read how we used main principles about cycles that drive stock prices proposed by JM Hurst to build and easy-to-follow indicator for TradingView.
The Multi timeframe Cycle Trader indicator identifies four main underlying cycles that drive stock price and detects points when those cycles simultaneously make bottoms.
In 1970s an American engineer JM Hurst proposed a theory that claimed that dynamic of stock prices could be explained by underlying repeating cycles. His idea was that rallies in stocks were driven by up cycles and declines were driven by down cycles. He claimed that there were several cycles of different period and amplitude that combined together drove stock prices up and down. Probably his main discovery was that cycles get synchronized at price troughs.
Look at the simplified cycle model shown above. You can see a bunch of sinewaves. You can see that each cycle has its own stable period, a distance between two peaks or troughs. You can note that the longer the distance between peaks and troughs, the higher the amplitude of that cycle is. If period of a cycle is five weeks, it will be able to push price on a much bigger distance in comparison to a cycle with a period of five days. Hurst called it the Principle of Proportionality; cycles have amplitude that is proportional to their wavelength.
Hurst argued that adding several cycles together we can explain movement of price. He called that the Principle of Summation.
Probably the most useful discovery he made was the Principle of Synchronicity. According to that principle, from time to time several distinctive cycles reach their respective bottoms simultaneously. If we take into consideration the Principle of Summation and the Principle of Synchronicity, we can conclude that points when several cycles make bottoms at one time should be aligned with important lows on stock price charts.
On the chart of the cycle model shown above you can see points marked with green and white arrows. The green arrows point to troughs simultaneously made by four cycles. The white arrows point to troughs simultaneously made by two cycles. The troughs formed by four cycles would correspond to much more significant price lows than those formed by two cycles.
Now let me show how the Cycle Trader indicator for TradingView charting platform performs cycle analysis and provide traders with invaluable insights.
On the 120 min chart of ES-mini shown below you can see the red horizontal lines that caught peaks in price and the green horizonal lines that caught troughs in price. The Cycle Trader Indicator finds the most stable cycle on any timeframe and draws support and resistance levels.
In this article we will focus on the sharp bullish reversal made by ES-mini at 1–30 PM on Friday, May 19, 2022.
Below you can see 30 min chart of ES mini showing that reversal:
The Cycle Indicator printed a green horizontal line at 1–30 PM. When the indicator prints a green horizontal line on a stock chart that means it detected signs that the down cycle that used to drive price down is about to bottom or has bottomed. Once a down cycle bottoms, a new up cycle starts to push price up off the newly printed support. As I have shown you on two chart above, at least two underlying cycles in ES-mini found their bottoms at 1–30 PM EST on Friday, May 23rd.
You would be surprised, but if you tracked ES-min on 60 min timeframe you would see a similar picture:
The Cycle Indicator printed a green horizontal line on 60 min chart of ES-mini at 1–30 PM as well.
That is a great real-life example showing the Principle of Synchronicity at work.
According to the Principle of Synchronicity introduced by JM Hurst, from time to time several distinctive cycles reach their respective bottoms simultaneously.
The strong rally in ES-mini that started at 1–30 PM confirms the main practical conclusion a trader can make from JM Hurst’s work:
when several cycles simultaneously make bottoms that should be aligned with important lasting bottoms in the stock price.
When a cycle reaches a bottom of a down cycle and turns up it starts to push price higher. If several cycles reach bottoms simultaneously and turn up, they start pushing price higher with combined energy! This is what makes trading of those important lows confirmed by bottoms in multiple cycles so attractive!
I used to instruct traders to keep watching stocks or futures contracts they traded on several timeframes in order to spot moments when several cycles would bottom. That was a difficult task to perform because you would have to switch back and forth between several timeframes. But all the complexity of cycle analysis was gone when I released a multi-timeframe version of the Cycle Trader Indicator!
That indicator identified a point when four cycles bottomed on Friday, May 19th:
When the indictor drew a label “x4 support” that meant that the algo detected a point where four different cycles bottomed. Not only the indicator drew the label, but it also generated an alert that was posted in our trading chat room:
$ES1! , Four Cycles Bottomed.
$NQ1! , Three Cycles Bottomed
$RTY1! , Three Cycles Bottomed
As you can see, we have an algo that keep watching several major futures contracts and immediately notify us when it detects that attractive to trade bottoming formation.
In my next article I will show you how the MTF Cycle Indicator detected a double top short setup in ES-mini on May 17th, 2022:
Read more about the Cycle Trader Indicator here.
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