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The
HARLEY
Market Letter
Advanced Technical
Analysis of the
Financial Markets
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Knowing How To Track Market Cycles
Is Key To Investing
By Stanley C. Harley
September 2, 2001 - Ventura County Star
Buy low, sell high -- the axiom for successful investing. 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 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 cycles are not exact or precise clocks. Cycles expand and contract. Also, cycle highs and lows are not always price highs and lows.
The first premise in cyclical analysis is to identify the longest dominant cycle and then work down to the smallest cycle affecting price activity.
One interesting 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.
Having researched cyclical functions in the financial markets for many years, the best market rhythm I have found is one that fluctuates between 86-111 trading days. I refer to this trough-trough rhythm as the primary market cycle, and it averages 99 trading days (19.625 weeks or about 4.3 months). With a standard deviation of about nine trading days (roughly 9 percent), this cycle has defined the intermediate trends in the stock market for years and ranks as the very best cycle for intermediate-term investors.
Market cycles do not present the investor with a magical formula that will time a market upturn to the precise moment. But what they do afford, in objective fashion, is a means to quantify the timing of your investment decision. Patience counts. You may only get two or three really terrific buy signals in any calendar year, but isn't that enough?
-- Stan Harley publishes The Harley Market Letter, a monthly newsletter that provides advanced technical analysis of stocks, bonds, and precious metals. Call 484-4258 or e-mail sharley1@verizon.net with questions or visit www.harleymarketletter.com/. September 2, 2001
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