JM Hurst Cycles Analysis

Introduction to JM Hurst Cycles Analysis Methods

An Introduction to JM Hurst Cycles Analysis Methods. Article submitted by Christopher Grafton, Author of "Mastering Hurst Cycle Analysis".

Cycles in Sentiment

Most of us understand that cycles are part of the fabric of life and the world we live in.  Seasons come and go, night follows day, the tide rises and falls.  The way we perceive opportunity is also cyclical.  Feelings of optimism have to start somewhere, however tentatively.  As these feelings take hold, especially among large, interacting groups of people, they feed on what went before and grow. 

They continue to grow until things appear to be as good as they can get and at that point, they are.  Ebullience then gives way to a sense of reality, which gives way to the first inklings of doubt, which in turn become feelings of pessimism and eventually despair.  Then, when things look like they are as bad as they can be, they are and at that point the cycle starts up again.

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This simplified view of the mood of the crowd, the essence of contrarian investing, is our starting point. Prices in freely traded financial instruments progress in cycles of sentiment and market action, rather than being a random distribution of independent prices, is governed by underlying form.

At any one time there is a multiplicity of different sentiment cycles operating together. For example, it is quite possible for a long term investor to be negative on the market, but at the same time for a short term trader to be positive. A raging bull market to a day trader will just be noise to a pension fund manager. It is all a question of which cycles are under observation

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JM Hurst Trading Cycles Analysis

Fig3.8 Mastering Hurst Cycles AnalysisSometimes price cycles on a chart seem to be obvious, while at other times they are unclear.  Critics say that because cycles seem to come and go they cannot be trusted.  Mostly, however, these commentators lack the tools to correctly see beneath the surface of the market and to identify the cycles at work.

In order to do just that JM Hurst, an aerospace engineer working in the 1970s,developed an innovative approach to market analysis.

Seeking to apply his knowledge of the mathematics of cycles to financial markets, Hurst developed a system which he briefly taught as a course.  His original work is dense and a little complicated, but can be distilled into the following concepts:
Fig 3.8 Mastering Hurst Cycle Analysis    
  • All financial markets are cyclical.
  • There exists a finite set of cycles from very long to very short which tend to recur: the Nominal Model.
  • These cycles are related to one another by a factor of two or three: they are Harmonic.
  • Cycles build upon one another to form larger composite cycles: the principle of Summation.
  • Fig 3.8 shows how the longer the cycle, the larger the change in price: the principle of Proportionality.
  • Cycle lows tend to be sharp as the shorter cycles in the composite bottom together: Synchronicity.
  • On the other hand peaks (in equities at least) tend to be rounded as cycles tend to top out in succession.
  • Despite all of this, variation from the norm is to be expected. The market is a huge, sometimes unruly mob of competing interests, not a physics laboratory.
Hurst’s insight into what he believed was the true nature of market price action, led to the development of a set of tools which we will be using as we study the S&P 500 Index. The following description will need to be brief, but it should help you gain a flavour. Let’s quickly have a look at some key ideas in part 2 of An Introduction to JM Hurst Cycles Analysis Methods.

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Mastering Hurst Cycle Analysis

Mastering Hurst Cycle Analysis by Christopher GraftonA modern treatment of JM Hurst's original system of financial market analysis

by Christopher Grafton

Pages: 384
Published: 30 Nov 2011

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