J.M. Hurst

J.M. Hurst’s Cyclic Theory
In the 1970’s an American engineer called JM Hurst published a theory about why financial markets move in the way they do. The theory was the result of many years of research on powerful mainframe computers, and it became known as Hurst’s Cyclic Theory. Hurst claimed a 90% success rate trading on the basis of his theory, and yet the theory has remained largely undiscovered and often misunderstood.

Hurst published two seminal works: a book called The Profit Magic of Stock Transaction Timing, followed a few years later by a workshop-style course which was called the Cyclitec Cycles Course (now available as JM Hurst’s Cycles Course). There are a number of very enthusiastic advocates, prominent traders and writers who proclaim Hurst as the “father of cyclic analysis” and confirm the efficacy of the theory (including the late Brian Millard who wrote several books about Hurst’s theory), but why is it that the theory isn’t better known and more widely used by technical analysts? There are, in my opinion, two reasons:
  • Firstly, Hurst’s Cyclic Theory is not “easy”. While it is beautifully simple and elegant in its essence, it is not a simple theory to understand or to apply. The Cycles Course is over 1,500 pages long, and most people take several months to work through it.
  • Secondly, although the theory presented in both the Profit Magic book and the Cycles Course is the same, there is a vitally important distinction between the analysis processes presented in the two. Hurst claimed his success on the basis of the process presented in the Cycles Course, whereas many people read the Profit Magic book and go no further, with the consequence that they never discover the more effective process presented in the Cycles Course.

Hurst defined eight principles which like the axioms of a mathematical theory provide the definition of his cyclic theory. The eight Principles of Hurst’s Cyclic Theory are:
  1. The Principle of Commonality – All equity (or forex or commodity) price movements have many elements in common (in other words similar classes of tradable instruments have price movements with much in common)
  2. The Principle of Cyclicality – Price movements consist of a combination of specific waves and therefore exhibit cyclic characteristics.
  3. The Principle of Summation – Price waves which combine to produce the price movement do so by a process of simple addition.
  4. The Principle of Harmonicity – The wavelengths of neighbouring waves in the collection of cycles contributing to price movement are related by a small integer value.
  5. The Principle of Synchronicity – Waves in price movement are phased so as to cause simultaneous troughs wherever possible
  6. The Principle of Proportionality – Waves in price movement have an amplitude that is proportional to their wavelength.
  7. The Principle of Nominality – A specific, nominal collection of harmonically related waves is common to all price movements.
  8. The Principle of Variation – The previous four principles represent strong tendencies, from which variation is to be expected.
In essence these principles define a theory which describes the movement of a financial market as the combination of an infinite number of “cycles”. These cycles are all harmonically related to one another (their wavelengths are related by small integer values) and their troughs are synchronised where possible, as opposed to their peaks. The principles define exactly how cycles combine to produce a resultant price movement (with an allowance for some randomness and fundamental interaction).

Conclusion: These eight simple rules distinguish Hurst’s theory from any other cyclic theory. For instance most cyclic theories consider cycles in isolation from each other, and cycles are often seem to “disappear”. By contrast cycles never disappear according to Hurst’s theory, but they may be less apparent because of the way in which cycles combine. 

It is the fact that Hurst’s theory stipulates that there are an infinite number of cycles that makes it particularly different, and also begins to explain why it is impossible to forecast price movement with 100% accuracy. Just as it is impossible to conceive of the sum of two infinite numbers, it is impossible to define the result of combining an infinite number of cycles (Credits: www.sentienttrader.com - see also HERE & HERE).

The 9-Month Cycle

The  most important cycle in my work is the 9-Month Cycle. The 9-Month Cycle goes by other names - the 40-Week Cycle, the 39-Week Cycle, and the 8.6-Month Cycle, to name the ones I can think of at the moment. A lot of people follow it, and it is, I have come to believe, the most important cycle for use in intermediate-term market forecasting, because it helps us plan for and quickly identify the most important declines and rallies that we will encounter within the course of a year. Even if you are a short-term trader, it is essential that you be aware of the progress of the 9-Month Cycle so that you will be in tune with next higher trend.

The illustration above shows the basic structure of the 9-Month Cycle. As you can see, it consists of two 20-Week Cycles, labeled as "Phase 1" and 'Phase 2". Likewise, the 20-Week Cycle consists of a Phase 1 and 2 10-Week Cycle.

The most powerful rally during the 9-Month Cycle will normally occur during the first three months of the cycle as all three nesting cycles are combined in a united upward move. Conversely, the period when the market is most vulnerable to a significant decline is during the last three months of the cycle when all three cycles are moving downward together into their final troughs.

In a bull market the 9-Month Cycle crest  normally occurs in the sixth to eight month in the cycle (right translation), and in a bear market the crest should be expected in the second or third month of the cycle (left translation).

In addition to the cresting of the 9-Month Cycle, the next most significant event is the cresting and completion of the Phase 1 20-Week Cycle. This can materialize as a minor price correction or consolidation in a bull market, but in a bear market it will likely coincide with the cresting of the 9-Month Cycle.

Knowing this basic 9-Month Cycle structure, we can consider that we are at the least risk establishing new long positions during the first three months of the cycle, and the greatest risk of decline comes in the last three months of the cycle. The three months in the middle is a time when caution should be exercised - it can present risk as the Phase 1 20-Week Cycle rolls over into a trough, and it also can present new opportunity as the Phase 2 20-Week Cycle begins to move up (Credits: www.decisionpoint.com).