Stock Market Cycles, Patterns and Oscillators

By Walter Bressert

The order of the universe shows itself in the thousands of cycles observable in nature and documented by the Foundation for the Study of Cycles.  It shows in the minute structures of molecules, atoms and sub-atomic particles.  It also shows in the ordered structure of the solar system and, as scientists are now discovering, in the interrelationships of galaxies.  The smallest particles to the largest clusters of galaxies follow some kind of order...so why not the markets.

There are some who arbitrarily dismiss cycles and the natural order of the markets on the premise that such concepts smack of pre-determination and violate man's god-given free will.  But with his free will man can choose to participate in the markets or not, just as he has the choice to participate, or not, in the cycles of good times and recession through his investments.  By knowing the approximate timing of cycles man can use them to his advantage.

The predictable cycles of the seasons are there for man to use, and planting corn in November because prices are high would be a waste of time and money.  Through observation we know better.  Buying stocks or gold at the top of a market is something we all want to avoid, but unfortunately the fundamentals are almost always the most bullish, and most tempting, at tops.  Without study we are oblivious to the natural order of the markets, which must be actively sought out and discovered.  True, we do not know all of the rules of the markets, but we do know that we want to buy bottoms and sell tops.  We also know that we can rack up sizable profits by trading with the trend.

Fortunately for us, the energy of the markets is visible in the movement of price, which when charted, shows repeating patterns of time and price in cycles and Elliott Waves.  Market oscillators also reflect this energy as overbought and oversold levels are also cycle highs and lows.  By identifying the lengths of the most powerful and consistent cycles, called dominant cycles, we can often anticipate tops and bottoms as well as the direction of the trend, or longer cycle.  Much of this is explained in the book, "The Power of Oscillator/Cycle Combinations".

Oscillators such as the Relative Strength Index (RSI) and the Channel Commodity Index (CCI) are often used in the financial markets to help predict cycle tops and cycle bottoms.  The CCI is a longer-term oscillator that shows the cycle highs and lows more clearly than the sensitive RSI, which usually turns earlier, and also more frequently.  Both oscillators have buy and sell lines which are levels that serve as filters to help identify cycle tops and bottoms.  As a general guideline an oscillator will rise above a sell line and turn down at or before a cycle top; and an oscillator will drop below a buy line and turn up a t or before a cycle bottom.  It is of note that the longer term CCI and the shorter term RSI will complement each other in the identification of the cycle tops and bottoms. 

The 4-Year Cycle in the Stock Market

The 4-year cycle in the US stock market can be traced back to 1789, and is the dominant longer-term cycle affecting the stock market, setting trends that often last for three or more years.  A typical 4-year cycle averages 49 months from low-to-low, 36 months from low-to-high, and 13 months from high-to-low.  The average advance from low-to-high is 107%, or more than a doubling of the level at which the cycle began.  Averages, however, are not very helpful in trading a market.  All markets have a powerful and consistent weekly cycle that sets the intermediate-term trend.  By identifying this cycle it is possible to anticipate tops and bottoms and to determine trends.  An historical review of the DJIA and the S&P Index shows a cycle of approximately 20 weeks as measured from low-to-low.  However, cycles i the market do not move in sine waves, but often extend, contract and sometimes seem to skip a beat.  Markets also act differently in bull and bear markets, leaning to the right in bull markets to produce right translation, and leaning to the left in bear markets to produce left translation.