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The
HARLEY
Market Letter
Advanced Technical
Analysis of the
Financial Markets
P.O. Box 1062
Thousand Oaks, CA 91358-0062
Phone:
805-558-3590
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 Home
> Focus On Cycles |
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FOCUS
ON CYCLES
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How
Cycles are Governed |
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Cycles
and Fibonacci Numbers |
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Cycles
in Stocks, Bonds and Precious Metals |
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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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