Identifying Cup Formations Early

In my article “Identifying The Cup (With Or Without The Handle),” which appeared in the February 2006 Stocks & Commodities, I introduced a simple mechanical algorithmic method for identifying cup formations (also known as rounding bottoms) in their late phase. The core part of the algorithm was based on the idea of using a virtual grid on the chart. Since then, I have been asked by technical analysts to provide an algorithm for identifying possible cup formations in their early phase. This time I will show you how you can easily use the grid technique for spotting possible cup formations during their development.

The cup formation
In Figure 1 you can see a typical cup formation. I will not elaborate on the technical details of the cup formation (see “Related reading”). I will say that the identification method I introduced in my previous article on the subject was able to spot cup formations in their late phase (to the right after point C in Figure 1). The goal of the algorithm I will describe is to identify the development of such a formation before or near point C. “But are you sure a cup is being formed at point C?” you might ask. No, we are not. We can’t be sure that a specific formation is going to take place. However, if the price is about to form a cup, it has to form a half-cup before integrating the formation in its entirety. You might want to be informed that the price shows such intentions.

Hurst’s Cyclic Analysis by David Hickson

In the 1970s, an American engineer named J.M. Hurst published a thesis about why financial markets move the way they do. His expounded theory was the result of many years of research, and it became known as Hurst’s cyclic theory. Hurst claimed a 90% success rate trading on the basis of his theory, and yet his work has remained largely undiscovered and often misunderstood.

An almost-forgotten theory
Hurst published two seminal works: The Profit Magic Of Stock Transaction Timing, followed a few years later by a workshop-style course that was called the Cyclitec Cycles Course (now available as JM Hurst’s Cycles Course).

A number of enthusiastic advocates, prominent traders, and writers 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 isn’t it better known and more widely used by technical analysts? There are two possible reasons:

First, Hurst’s cyclic theory is not easy. While it is beautiful and elegant in its essence, it is not a simple theory to understand or apply. The Cycles Course is more than 1,500 pages long, and most people take several months to work through it.
Second, 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 them. 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 they never discover the more effective process presented in the Cycles Course.