Study of Cycles

I've been meaning to begin this blog to focus on the pursuit and retention of money for sometime.

While my original conceived purpose of this blog was quite broad, the impetus for actually starting it is going to be to document and catalogue my discovery and study of cyclicality in the marketplace.

Over time, surely, more diverse topics will leak their way into this blog, but for now, i intend to use this as a place to record my thoughts as a "newb" in technical analysis as it relates to and uses cyclicality to predict future price moves in financial markets.

While many people have suggested and proposed different methods for divining future price moves from past performance of securities, I intend to focus most of my studies on the work of cycles as first written about (to my knowledge) by JM Hurst.

JM Hurst penned the book The Profit Magic of Stock Transaction Timing.

While many concepts were discussed in Hurst's book, perhaps the most compelling was the idea of using offset moving averages to predict cyclical movements in stocks. (much more on this in later posts).

A Word About Cycles

To the naked eye consistent cyclicality is not evident when looking at a price/time chart of a stock or index. In fact, the movement of stocks has been likened to that of "random" or "brownian" motion of molecules in free space. In fact, this notion has become so entrenched as to spawn a popular book entitled, "A Random Walk on WallStreet" (which i've admittedly never read) and the popular concept of modelling financial behaviour around a normally distributed bell curve.

(While the notion of modeling financial securities behaviour around a normally distributed bell curve is worthy of it's own blog, "The Black Swan" is an excellent book that goes a long ways towards discrediting that notion -- for reasons completely separate from anything that we'll be talking about in our study of cycles.)

In fact, Hurst does not try to explain the reason for the cyclical nature of the financial markets, but only goes so far as to try to recognize and catelogue them.

Why Aren't the Cycles More Obvious?

The reason the cycles aren't more obvious when viewed by the naked eye according to Hurst is multi-fold.

First, there IS a bit of "randomness" in that the cycles, though recognized to *generally* fit a pattern, are acknowledged to show some variability around a "nominal" length of time. In addition, the strength of the given cycles can vary from cycle to cycle.

And lastly, and perhaps most significant, is that the cycles all interact "on top of" each other simultaneously. And therefore, it becomes difficult -- and almost impossible at times -- to discern one cycle from the next unless you understand and are cateloging ALL of the "known" cycles forces which are simultaneously exerting influence on a given security.

So What are These Cycles?

While the cycle lengths should be thought of as "nominal" (meaning, not precise) at times their presence can be seen with disturbing regularity.

Hurst, and his later disciples have roughly recognized the following nominal cycles (starting from the shortest and movin to the longest.

2 hr
4 hr
.87 day
3 - 3.5 day
7 day
14 day
5 week (25 day)
10 week
20 week
40 week
80 week
4 - 4.5 years
9 years
18 years


Confusing Time Scales

Now, here is where my first confusion came in. Hurst and his disciples are fond of using different time scales to express different cycles. In other words, hours, days, weeks, years are used....and sometimes months.

The confusion reigns because the time scales are thought of as "market time" In other words, a week would be the equivalent of 5 days (not 7).

It gets further confusing talking about hours....especially as they relate to different markets. While the stock market in NYC opens at 9:30 and closes at 4, how does one include (or not) after hours activity? And, in the futures markets they stay open all day except for a brief period of time (15 or 30 minutes) referred to as the "lockup" where trades for the day are settled.

I intend to do some research on these topics and report back a more thorough framework for understanding these different time scales in a later post.

ciao for now,
UG