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Home > Focus On Cycles
How Cycles are Governed
Cycles and Fibonacci Numbers
Cycles in Stocks, Bonds and Precious Metals

In my study of the financial markets, I have found that an awareness of cyclical functions is key to understanding the movement of prices and investor behavior. The knowledge and exploitation of cycles embodies one of the most powerful analytical tools available for identifying trends and forecasting their reversals. Once a cycle has bottomed, the trend in the market is up until the cycle peaks. After peaking, the trend in the market will be down until the cycle bottoms.

The actual existence of specific time cycles in market price behavior is not universally accepted. Many will argue that recognizing cycles in the markets is akin to seeing terrestrial objects in the clouds; if one looks long enough for patterns that resemble specific shapes, chances are one will find them. But close visual inspection and simple mathematical analysis will reveal up and down movements that do, indeed, occur on a regular basis. Each market has a cyclical profile that consistently affects price movement. The beginning of one cycle is the end of another, and the time interval between the two lows (troughs) defines the market cycle. But, like most things in art and nature, there is variance. Cycles are not an exact or precise clock. A 27 day cycle is not always 27 days. Cycles expand and contract. In strongly trending markets, they will sometimes fade, seemingly disappear, or skip a beat or two, only to reoccur. Occasionally they undergo a phase shift. And cycle highs and lows are not always price highs and lows. It is not uncommon for the price high or (especially) the low to occur before the cycle high or low, with the cycle high/low associated with the retest event.

Despite their lack of ultra-precision, cycles are a very useful tool. The first premise in cyclical analysis is to identify the longest dominant cycle, and then work down to the smallest cycle affecting price activity. Most cycles have subcycles embedded within them, usually two or three, which I refer to as the alpha, bravo, and charlie components. When a particular cycle is nearing its trough, it will tend to dominate the shorter cycles which comprise it, causing them to contract or expand beyond their usual frequency schedule.

For my analysis, I like to perform a statistical analysis of the cycle I have under study. I compute the mean, the median, the variance and the standard deviation. I have found that most cycles have a standard deviation on the order of 20% of their mean periodicity. I then extrapolate this information to predict the cycle's next occurrence. The very best cycle I have found in the stock market averages 19.625 weeks (99 trading days). With a standard deviation of about 9 trading days (roughly 9%), this cycle ranks as the very best of the cyclical functions I have found. All other cycles I have found are prone to invert and skip a beat or two. This one does not.

One final characteristic of cyclical behavior involves the concept of translation. In bull markets, there is the tendency for the cycle high (crest) to occur to the right of the midpoint of the cycle. This is known as right translation, with prices rising for a greater amount of time to the high than it takes to decline to its next low, and is characteristic of bull market cyclical structure. In bear markets, the same cyclical schedule from low-to-low is retained, but there is the tendency for the cycle high to occur to the left of the midpoint of the cycle. This is known as left translation, with prices rising for a shorter amount of time to the high than it takes to decline to it next low, and is characteristic of bear market cyclical structure.
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