All markets exhibit cycles. Cycles are the "heart beat" of the markets.
You can use cycles to your advantage by determining an optimum time to enter and exit a market and thus make a profit.
Contrary to some theorists, cycles occur 100% of the time.
When they can't explain or follow market action they say it is not cycling.
You can learn that by following cycle phase you can determine lower risk entry and exit points.
And you will be able to better anticipate future price moves.
Cycle Analysis takes much of the guesswork out of following the markets.
By automating the decision process much of the emotional stress can be removed.
On its own cycle analysis will only give you a rough idea about timing and phase. It should be combined with other skills from your tool chest to enhance the decison making process.
Cycle Analysis is not infallible. There is no such thing as a dead certainty, only higher probability and lower probability scenarios.
Discover and understand stock index, commodity and currency market cycles. Learn about market analysis and the market heart beat.
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| 1880's America's Great Plains Mortgage Crisis History repeats itself in the form of cycles. Major credit crises: 1880's, 1930's, 2007-8. Read on... |
This refers to market cycles as opposed to astronomical cycles or wave patterns.
Cycles can be measured from trough to trough or apex to apex. For consistency, we choose trough to trough. A cycle has:
Where one cycle ends is the start of the next. There are no periods where there is no cycle.
Some analysts define a cycle as double the above definition producing an M formation. Unfortunately, using this definition means that there will be some V shaped cycles 
where the 1st up move/down move refers to an old bear move and the 2nd up move/down move refers to a new bull move. This approach means a V shaped cycles spans two longer term cycles and also means there would be a non-integer shorter cycle count within a longer cycle.
Example.
In a bull market the duration of the up move is typically longer than the duration of the down move. Thus, the cycle apex comes late in the cycle. In a bear market the duration of the down move is typically longer than the duration of the up move. Thus, the cycle apex usually occurs early in the cycle.
Arguably, it is better to make hard and fast rules to define each cycle to avoid having to make an educated guess as uncertainty only adds to confusion.
Any cycle is made up of an integer number of the next smaller cycle. See below.
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Up move duration is longer than down move duration. Thus, the cycle apex appears closer to the second trough than the first trough. A classical pattern in a bull market. Example.
A classic bull cycle is one where the up phase lasts longer than the down phase. The up phase may be steady or relentless but the down phase tends to be sudden, short-lived and with increased daily range.
Up move duration is shorter than down move duration. Thus, the cycle apex appears closer to the first trough than the second trough. A classical pattern in a bear market. Example.
A classic bear cycle is one where the down phase lasts longer than the up phase. The down phase may be steady or relentless but the up phase tends to be sudden, short-lived and with increased daily range.
Based on weekly data. Length dependent on the particular market and even varies for each market but typically 5-12 weeks.
Based on monthly data. Length dependent on the particular market and even varies for each market but typically 8-13 months. Thus, there is approximately, one seasonal cycle every year in every market and is often thought of as the yearly cycle. However, there are many short seasonal cycles less than a year hence the term seasonal cycle. This is the cycle to look at for the big move. The seasonal cycle is made up of an integer number of primary cycles.
This cycle tends to be about 3 to 5 years in length on average. The US and UK stock indices predominantly make a 4 year cycle but sometimes makes a shorter 3-4 Year Cycle like the two 3 year cycles back to back in 1984-1987 and 1987-1990.
The average length is around 13 years, typically 7-18 years and varies from market to market.
Kondratieff, a Russian economist identified an approximate 55 year economic and social development cycle based on English consumer and wholesale prices since 1288. This also applies to financial and commodity markets. Lengths may vary e.g. 42-72 years. It typically comprises 3-5 ~13 year cycles.
The last two confirmed ~55 year cycle lows in the Dow were in 1932 and 1987 made up of 1932-1942-1949-1962-1974-1987 ~13 Year Cycles. The 4-year low in 2002 was also a ~13 year low (1987-2002). We have not yet completed another 4 year cycle because this is one has over-run which usually ends with a large correction which is now imminent.
It is very important at this stage for the US and UK stock indices to rise consistently for many years to come with the 2000 highs in the US and UK stock indices being breached. If the 2002 lows are taken out by the next ~13 year low we would not only have a bear ~13 year cycle but also give a very early cycle apex in the ~55 year cycle. Early cycle apexes are typically associated with bear cycles. If this transpired, the 55 year cycle would then suggest a long term bear market longer than the depression in the 1930s.
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The recent Subprime debacle is a fine example of the 55 year cycle in credit expansion and contraction. The current credit cycle has been in an expansionary phase for over 60 years since the end of WWII in 1945. This credit expansion was allowed to continue longer than expected though interference by the Federal Reserve in the late 90's so fuelling the credit party with easy money (only to be made worse after 9/11 with almost free money). At the time, the Fed created the appearance of stability but at the expense of great insatability tomorrow. Thus, we can expect we have now reached the top of this 55 year cycle. However, such crises typically take a decade or more to resolve themselves and so bring the 55 year cycle to an end (and if so, with it the credibility of the Federal Reserve).
The visual illusion that the immediately preceding cycle looks almost like the mirror image of the current cycle.
Market price does not stay at an extreme high nor at an extreme low indefinitely. Eventually, the market must return back to its mean price. When it does the market makes a correction.
Further, if a shorter than average cycle occurs, it is typically followed by a longer cycle whereby the average of the two cycle lengths is approximately the mean cycle length. Example.
There are instances whereby 2 short (or even 2 long) cycles occur back-to-back. In which case the cycle immediately preceding and immediately after the 2 cycles tend to be longer (shorter), thus creating an illusion of symmetry. Example.
The trend is dependent on the time frame. For example in a bull seasonal cycle, prices will move down in the down move phase of the cycle. The down move phase of the seasonal cycle will comprise of one or more bear primary cycles.
"What is the current trend"? To better answer this question one must know which cycle we wish to know the trend as this gives us a better perspective of the expected duration of the trend. Thus, "what is the current Primary Cycle trend" would be a more precise question.
If the cycle in question is a bull, it may be better to think of the down move phase as a correction rather than an outright bear (and vice-versa for bear cycles whereby the up move is a corrective phase). Example.
Conditions to be met:
Price swing: The price goes up, then down, then up again.
Indicator swing: The indicator goes up, then down, then up again.
Price swing: The price goes down, then up, then down again.
Indicator swing: the indicator goes down, then up, then down again.
