An Overview of Stock Market Cycle

8/14/2019 An Overview of Stock Market Cycle

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Cycle "Translation"

You will often hear reference to a cycle's "translation". This refers to the fact that cycles rarely crest in the exact center between troughs. More often they will crest to the right of center, called a "right translatto the left of center, called a "left transl ation" cycle. (This has to be something an engineer dreamed up. Wouldn't it be ea sier to say the cycle "leans" to the right or left? Maybe not, because then everybody wwhat it means.)

In a bull market the market spends more time going up than down, so we will normally expect major cycles to crest toward the end of the cycle, with the crest being f ollowed by the down phase of the cycle --translation. Note in the illustration below that a right transl ation also means that the cycle trough after the crest will normally be higher than the trough at the beginning of the cycle.

In a bear market we would expect to see left translation cycles with cycle patterns exactly the opposite of those in a bull market.

Rules Regarding Cycles

Rule 1: Price movement is a manifestation of cycle forces, not the cycle force itself. When we refer to a cycle, we are technically referring to an invisible psychological force driving the price moves we can obschart, but we will most often describe th e cycle in terms of price movement because that is where we can n ormally see the cycle force at work; however, there are times wh en the evidence of cycle movementeasier to spot by reference to an internal indicator.

Rule 2: A cycle low is n ot always found at the price low for the c ycle. This is just an extension of Rule 1, and it is a reminder that we are primarily trying to identify the point at which cycle forces change directbegin moving upward into the next cycle. We will use various methods to do this, so remember not to get confused when the price low and the cycle low are miles apart.

Rule 3: Cycles can expand and contract at will. We project cycle lows based on averages, but we always have to be alert for changes in the expected length . The variability of cycle length can be so extreme thnumber of subordinate cycles within a greater cycle can change. For example we might find three 10-Week Cycles within a 20-Week Cycle.

Rule 4: A cycle of greater magnitude will truncate the length of subordinate cycles . The best example of this is the two 20-Week Cycles within the 9-Month Cycle. The phase one 20-Week is usually longer thantwo 20-Week, which is normally shortened by a 9-Month Cycle m aking its lows on time. In other words, a 9-Month Cycle does not expand to accommodate a lengthening 20-Week Cycle.

Rule 5: Cycle length is a "nominal" identification based on averages . If you do the math, you will find that there are 5.3 9-Month Cycles within each 4-Year Cycle, yet we only depict 5 because it is simpler to waverages.


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The 9-Month Cycle

The most important cycle in my work is the 9-Month Cycle. The 9-Month Cycle goes by other names -- the 40-Week Cycle, the 39-Week Cycle, and the 8.6-Month Cycle, to name the ones I can think of at the mopeople follow it, and it is, I have come to believe, the most important cycle for use in intermediate-term market forecasting, because it helps us plan for and quickly identify the most important declines an d ralliesencounter within the course of a year. Even if you are a short-term trader, it is ess ential that you be aware of the progress of the 9-Month Cycle so that you will be in tune with next higher trend.

The illustration above shows the basic structure of the 9-Month Cycle. As you can see, it consists of two 20-Week Cycles, labeled as "Phase 1" and 'Phase 2". Likewise, the 20-Week Cycle consists of a Phase 1 and

Cycle.

The most powerful rally during the 9-Month Cycle will normally occur during the first three months of the cycle as all three nesting c ycles are combined in a un ited upward move. Conversely, the period when thevulnerable to a significant decline is during the last three months of the cycle when all three cycles are moving downward together into their final troughs.

In a bull market the 9-Month Cycle crest normally occurs in the sixth to eight month in the cycle (right translation), and in a bear market the crest should be expected in the second or third month of the cycle (le

In addition to the cresting of the 9-Month Cycle, the n ext most significant event is the cresting and completion of the Phase 1 20-Week Cycle. This can materialize as a minor price correction or consolidation in a bin a bear market it will l ikely coincide with the cresting of the 9-Month Cycle.

Knowing this basic 9-Month Cycle structure, we can consider that we are at the least risk establishing new long positions du ring the first three months of the cycle, and the greatest risk of decline comes in the lastof the cycle. The three months in the middle is a time when caution should be exercised -- it can present risk as the Phase 1 20-Week Cycle rolls over into a trough, and it also can present n ew opportunity as theWeek Cycle begins to move up.

Real-Life Examples of the 9-Month Cycle

The chart below shows examples of 9-Month Cycles -- the beginning and end of the cycles is marked by the dotted red lines. Of the three complete cycles shown only the f irst (January to October 1998) is what Iperfect example of a 9-Month Cycle. The two cycles that follow are two of the worst examples I have ever seen, but they do serve to illustrate the difficulty of working with cycles.

Another concept illustrated by this chart is how to use technical indicators to identify or confirm cycle lows. For example, the October 1998 low was confirmed by a beau tiful positive divergence on both the ITBM ahigher oscillator bottoms associated with the double bottom on the price index. In February 2000 the cycle low was confirmed by relatively oversold bottoms on the ITVM and ITBM.

Some may disagree with my designation of a 9-Month Cycle low in June 1999, but I decided to adhe re to the nominal cycle schedule, wh ich was more or less confirmed by a series of short-term bottoms on the ITand by its location between the easily identifiable October 1998 and February 2000 cycle lows.


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What we have presented is a structu re or paradigm within which we ca n approach analysis of cycles in real time. It is not carved in stone, and you have to be flexible in your approach to cycle analysis -- more or lthe left brain and use right brain functions of creativity and intuition. Remember, there are two primary objectives:

(1) To identify the 9-Month Cycle low as soon as possible because it represents the best buying opportunity in the entire nine months; and

(2) To correctly identify the crest of the 9-Month Cycle because it is from these tops that significant market declines normally begin.

We accomplish these objectives is by tracking su bordinate cycles and other market indicators.

Nominal Count Versus Price Count

On the chart below the vertical lines show the location of Nominal 9-Month Cycle troughs since 1996. The normal expectation is that the price index will arc from trough to trough, but sometimes other forces overcycle pressures, as happened in 1999 and 2000 when the market was transitioning from secular bull to secular bear.


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Because we are depicting "nominal" cycle projections, all the lines are of equal distance from one another, and they sh ow where the cycle trough is assu med to be located. In other words, we believe that cy cle peconsistent, but price movement doesn't always conform to the cycle i deal.

Even though prominent price lows don't always hit the nominal targets, you can see that price movement tends to be drawn to the projections based upon the nominal count. For this reason I us e theprojecting the 9-Month and longer-term cycles.

For shorter cycles, it is best, in my opinion, to use the price count . For example, when a prominent price low can be identified, it can be used to project the arrival of the next 5-Week or 10-Week Cycle trough. Wthe nominal count and the price count projections in the Decision Point Alert daily report.

Conclusion

We can observe on most price charts that prices move in cyclical patterns, and u sing cycle studies is one way to anticipate periods of weakness and strength. While using cycles may at first s eem obvious and intuiactually be quite frustrating, particularly if you expect prices to conform precisely to your projections. It doesn't usually happen that way.

No two people use cycles in exactly the s ame way. Even people using similar methodologies will not necessarily arrive at the same conclusions. It is best, in my opinion, to use cycle projections as one element of market analysis, giving it more or less w eight depending upon how closely prices a re conforming to the cycle projection.

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An Overview of Stock Market Cycle