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Market Cycles


Cycles are extremely important because they help us frame the market within the dimension of time. I was led to cycle studies by people whose work I respect, not the least of whom was Stan Harley (The Harley
Market Letter; 805-484-4258), Timer Digest's 1998 Timer of the Year. Stan's work with cycles is not entirely unique, but he understands cycles as well as anyone I know, and he has been very helpful to me, both i
my research to understand cycles better and in the preparation of this article.

I should also emphasize at the outset that this article represents my own interpretation of of what I have learned from others. The concepts are not altogether original, and I certainly give credit to those who have
pioneered them; however, my conclusions may differ significantly from those of other cycle proponents. In other words, this is not necessarily the last or best word you will read on the subject.

The first thing we should do is ask what cycles are. This is not an easy question to answer, so let's just say that cycles are the observable tendency of prices to arc from trough (bottom) to trough at regular interva
The price index will move upward from one trough until it reaches a crest (top), then the price index arcs downward into the next trough, or cycle low, as we sometimes refer to it. We can see the evenly spaced
bottoms on the price chart that give evidence of the existence of cycles, but what causes this to happen? What is the cyclical force behind the price movement?

A stock market chart is a picture of human emotions expressed in the form of price movement. Fundamental events don't directly move stock prices, it is the emotional reaction to those events that moves prices. I
much broader context there are recurring events in nature and in the business cycle that affect human emotions. In other words, natural and fundamental events do affect the market, but only through the filter of
human emotions. This is why it is so difficult to design economic or market forecasting models based on fundamentals -- humans can react quite differently to the same fundamental circumstances at different time

The Foundation for the Study of Cycles has catalogued about 20,000 cycles. One of the most obvious and observable is the circadian cycle, the change from day to night to day, which is caused by the rotation of th
planet (or the rising and setting of the sun, depending on your point of view), but, since it is only one of 20,000 cycles, it is obvious that cycle study is much more complex than we might like. We can observe
recurring cycles in price movement, but we should remember that the "force" behind the cycle will manifest itself differently in each cycle, and, while we might expect a significant price low at a scheduled cycle
bottom, it may not play out the way we originally forecast it.

Since a picture is worth a thousand words, let's look at an idealized illustration of Nominal Market Cycles below, a concept I am borrowing from my late friend and mentor Kennedy Gammage. Here we can see how
cycles would look if they were perfect. There are two 10-Week Cycles within one 20-Week Cycle, two 20-Week Cycles within one 9-Month Cycle, and so on. Where cycles of different lengths make their lows at the
same time, they are said to be "nesting".

The most compelling thing about this picture is the impression of power associated with major nesting points -- where all cycles are making lows at the same time at the 10-Week, 20-Week, 9-Month, 18-Month, an
4-Year Cycle lows. Visually we can sense that price declines into these major lows will be quite severe, while rallies off those lows will be explosive and powerful. Conversely, there other areas in the cycle structure
where the cycle forces are mixed, with some cycles moving up while others are moving down, and it is hard to get a sense of exactly which direction a composite of these cycles would be pushing the market.

I have begun to think of cycles in terms of being a rising and falling of emotional energy caused by natural and fundamental conditions and events. While it cannot be quantified, we can imagine it as being somethi
like the currents in a winding, fast moving river. Sometimes we can observe the currents on the surface, twisting and turning, combining with other currents and becoming stronger, splitting apart and becoming
weaker, then submerging and disappearing completely, only to reappear again further down stream.

When applying this concept to price cycles, we can be a little more open-minded and cautious in our expectations of the cycles we are following. Sometimes we will be able to see the cycle quite clearly, and other
times it will disappear. Sometimes it will behave in a predictable manner with the down side of the cycle resulting in price declines and the up side of the cycle resulting in price advances, while other times price
movement will be quite different than we had anticipated. In other words, cycles are useful, but they are treacherous. Use them with care.
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 translat
to the left of center, called a "left translation" cycle. (This has to be something an engineer dreamed up. Wouldn't it be easier to say the cycle "leans" to the right or left? Maybe not, because then everybody w
what 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 followed by the down phase of the cycle --
translation. Note in the illustration below that a right translation 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 obse
chart, but we will most often describe the cycle in terms of price movement because that is where we can normally see the cycle force at work; however, there are times when the evidence of cycle movement
easier to spot by reference to an internal indicator.

Rule 2: A cycle low is not always found at the price low for the cycle. 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 direct
begin 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 th
number 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 than
two 20-Week, which is normally shortened by a 9-Month Cycle making 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 w
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 mom
people 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 and rallies
encounter within the course of a year. Even if you are a short-term trader, it is essential 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

The most powerful rally during the 9-Month Cycle will normally occur during the first three months of the cycle as all three nesting cycles are combined in a united upward move. Conversely, the period when the m
vulnerable 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 (lef

In addition to the cresting of the 9-Month Cycle, the next 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 b
in a bear market it will likely 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 during the first three months of the cycle, and the greatest risk of decline comes in the last
of 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 new opportunity as the P
Week 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 first (January to October 1998) is what I w
perfect 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 beautiful positive divergence on both the ITBM an
higher 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 adhere to the nominal cycle schedule, which was more or less confirmed by a series of short-term bottoms on the ITB
and by its location between the easily identifiable October 1998 and February 2000 cycle lows.
What we have presented is a structure or paradigm within which we can 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 l
the 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 subordinate 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 overr
cycle pressures, as happened in 1999 and 2000 when the market was transitioning from secular bull to secular bear.
Because we are depicting "nominal" cycle projections, all the lines are of equal distance from one another, and they show where the cycle trough is assumed to be located. In other words, we believe that cycle per
consistent, but price movement doesn't always conform to the cycle ideal.

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 use the nominal cou
projecting 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. W
the nominal count and the price count projections in the Decision Point Alert daily report.


We can observe on most price charts that prices move in cyclical patterns, and using cycle studies is one way to anticipate periods of weakness and strength. While using cycles may at first seem obvious and intuit
actually 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 same 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 y
market analysis, giving it more or less weight depending upon how closely prices are conforming to the cycle projection.