SPDR S&P 500 (SPY)

[Fox13]

H&S and Cycle Theory.

In his book “The Profit Magic…” Hurst explains in detail why he sees the H&S formation as a consequence of the interaction of synchronous cycles. The story becomes more complicated when some cycles are slightly out of phase in spite of a reasonable 2x multiplicity of their periods. In addition, some larger cycles have often a preferential side translation (i.e. they are tilted - in our case to the right) The chart below represents such a scenario in which the cycles have been chosen ad hoc. When you sum the 2 smaller cycles (green and yellow) you get a composite behavior (thick green) which resembles the head and shoulder, which in turn is partially included in the grand cycle (thick grey). I also represented the movements of the cyclic smaller channel (purple) within the larger cyclic channel (green). The 2 SD regression channels which meet on top of the “head” are also there.
There is something that bothers me in this chart. The very powerful effect of the smaller cycles on the price action is not in line with the “cycle theory” according to which the bigger the cycle the more “powerful” it should be. For example, the latest deep low on 07/08 was “induced” by the smallest cycle (green) although the 2 larger cycles had already produced a nest of lows and were going up. One might speculate that in strongly manipulated markets (that poor Hurst never imagined in 1970) the mini-moves are violent and excessive since they are used as a powerful mechanism of extortion.
Anyway…So, where do we go now? We should go UP since all three cycles are going UP…