Chapter 8 - Time Cycles Flashcards
What is amplitude?
The height of a wave in cycle analysis; calculated as the difference between the
wave’s peak and the wave’s trough.
What is a decennial pattern?
Edgar Smith’s description of the stock market over a ten-year cycle; years ending
in a 2, 4, 5, or 8 tend to be strong, while years ending in 1, 3, 6, 7, and 0 tend to be
weak.
What is harmonicity?
In cycle analysis, the principle that adjacent cycles are often related by small, whole
numbers; for example, the next larger cycle might be twice the length of the shorter cycle.
EXAMPLE: If we’re considering a 9 month cycle, the next cycles we might consider would be the 4.5 month or 18 month cycles.
What is the January effect?
The tendency of all markets to end the year higher if prices rally in January, or end the
year lower if they decline in January.
What is the Jugular cycle?
An observation by Clement Jugular that interest rates follow a 9 to 11 year cycle in
four phases: prosperity, crisis, liquidation, and recession.
What is the Kitchin cycle?
An observation by Joseph Kitchin that economic statistics follow a 40-month cycle; further study indicates that the cycle can range between 40 and 53 months.
What is the Kondratieff Cycle?
An observation by Nikolai Kondratieff that capitalist economies follow a 50 to 60 year (average 54) cycle.
Explain KST (Know Sure Thing).
KST combines four different rate of change studies into one unified chart in order to analyze the long-term (primary) trend.
Describe the “Nine-Month Cycle.”
An observation that commodity and stock prices follow a nine- to twelve-month cycle.
What is a period?
The number of time units necessary to complete one wavelength or cycle.
What is a phase?
A measure of the time location of a wave trough.
What is the “Principle of Variation?”
The theory that cyclical patterns are strong tendencies and not immutable rules.
What is synchronicity?
The principle that cycles of various lengths tend to bottom at similar times.
Describe the relationship between cycles and market timing.
- Using historical market cycles to detect highs and lows offers insight into key turning
points for a given market. - Once identification of the timing of probable market reversals has been made, stock
selection (for equity markets) becomes the key to profit maximization.
Describe the structure of cycles.
- The extreme points of a cycle are known as peaks (tops) and troughs (bottoms).
- Other characteristics of a cycle are amplitude, period and phase.
- A cycle’s amplitude measures the height of the cycle, from the trough to the peak.
- A cycle’s period measures the length (i.e., the time) of one complete cycle, and is usually
measured from trough to trough. - A cycle’s phase defines the time location of a wave trough, and is used to measure the
time difference between troughs of different cycles (phasing).
Describe the cyclical principles of summation, synchronicity, and harmonicity.
- The summation principle states that all price movement is the sum of all active cycles. (THINK OF CONSTRUCTIVE AND DESTRUCTIVE INTERFERENCE FROM PHYSICS)
- The synchronicity principle states that cycles of varying lengths tend to establish
troughs at similar points in time. - The harmonicity principle states that adjacent cycles are often related by small whole
numbers. (ex., 4.5 month, 9 month, 18 month)
What are the various prominent cycles?
- The Kondratieff Cycle is a 50- to 60-year cycle of prosperity and recession in capitalist
economies. - The Jugular Cycle was proposed by Clement Jugular and is a 9 to 11year cycle of
economic boom and busts. - The Kitchin Cycle is a 40-month or 4-year cycle of economic activity.
- The Decennial Pattern is a repetitive 10-year cycle that begins with years ending in “1”
(1971, 1981, etc.). - Smith identified years ending in 2, 4, 5, and 8 as being bullish for equities, whereas
years ending 1, 3, 6, 7, and 0 tend to be bearish.
What are intermarket cycles?
Martin Pring has suggested that a relationship exists between stocks, bonds and
commodities based on the various stages of the business cycle.
Explain the KST indicator.
- The KST indicator is a weighted average of four different ROC indicators (9-month,
12-month, 18-month and 24-month). - The weights are in proportion to the time covered, with the 24-month ROC having the
greatest weight, thereby placing emphasis on the longer-term trend. - KST is often filtered with a moving average, using crossovers to generate buy and sell signals.
Explain how cycle analysis can be combined with other technical analysis tools.
Although cycle analysis identifies time windows for peaks and troughs, confirmation of a market turn should come from other technical tools and/or formations that occur
during these time windows.
What is a cycle?
A series of events that are regularly repeated in the same order.
How do the prices of most commodities reflect seasonal cycles?
The prices of most commodities reflect seasonal cycles, which means that these markets have a tendency to move in a given direction at specific times of the year.
Provide an example of an ideal cycle peak.
If we have a 20-week cycle, for example, the IDEAL PEAK would be at the 10-week mark.
Do peaks often fall at the ideal cycle peak?
NO! Cycle peaks often shift to either the left or the right of the ideal cycle midpoint. The trend of the next larger cycle helps to determine where a peak will occur. If the trend is bullish, then the cycle peak often takes place after the halfway point in the cycle and is said to be “translated to the right.” Conversely, if the longer-term trend is down, the cycle peak often shifts to the left of the theoretical midpoint and the cycle is said to have “translated to the left.” Why does this translation occur? In a bullish market, where prices are generally rising, optimism and confidence among investors tend to prevail. This positive sentiment can lead to a tendency for prices to continue rising for longer periods than anticipated. Conversely, in a bearish market, where prices are generally falling, pessimism and fear among investors dominate. This negative sentiment can lead to a quicker exhaustion of selling pressure, causing prices to bottom out sooner than expected.
UNDERLYING PRINCIPLE:
- In a bull market, upward price movements dominate and are more prolonged
- In a bear market, downward price movements dominate and are more prolonged