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The
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Advanced Technical
Analysis of the
Financial Markets
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Knowing
How To Track Market Cycles
Is Key To Investing
By
Stanley C. Harley
September 2, 2001 - Ventura County Star
Buy low, sell high -- the axiom for successful investing.
In my study of the financial markets, I have found that
an awareness of cyclical functions is key to understanding
the movement of prices and investor behavior. The knowledge
and exploitation of cycles embodies one of the most powerful
analytical tools available for identifying trends and forecasting
their reversals. Once a cycle has bottomed, the trend in
the market is up until the cycle peaks. After peaking, the
trend in the market will be down until the cycle bottoms.
The existence of specific time cycles in market price behavior
is not universally accepted. Many will argue that recognizing
cycles in the markets is akin to seeing terrestrial objects
in the clouds; if one looks long enough for patterns that
resemble specific shapes, chances are one will find them.
But close visual inspection and simple mathematical analysis
will reveal up and down movements that do, indeed, occur
on a regular basis. Each market has a cyclical profile that
consistently affects price movement. The beginning of one
cycle is the end of another, and the time interval between
the two lows (troughs) defines the market cycle. But cycles
are not exact or precise clocks. Cycles expand and contract.
Also, cycle highs and lows are not always price highs and
lows.
The first premise in cyclical analysis is to identify the
longest dominant cycle and then work down to the smallest
cycle affecting price activity.
One interesting characteristic of cyclical behavior involves
the concept of translation. In bull markets, there is the
tendency for the cycle high (crest) to occur to the right
of the midpoint of the cycle. This is known as right translation,
with prices rising for a greater amount of time to the high
than it takes to decline to its next low, and is characteristic
of bull-market cyclical structure. In bear markets, the
same cyclical schedule from low to low is retained, but
there is the tendency for the cycle high to occur to the
left of the midpoint of the cycle. This is known as left
translation, with prices rising for a shorter amount of
time to the high than it takes to decline to it next low.
Having researched cyclical functions in the financial markets
for many years, the best market rhythm I have found is one
that fluctuates between 86-111 trading days. I refer to
this trough-trough rhythm as the primary market cycle, and
it averages 99 trading days (19.625 weeks or about 4.3 months).
With a standard deviation of about nine trading days (roughly
9 percent), this cycle has defined the intermediate trends
in the stock market for years and ranks as the very best
cycle for intermediate-term investors.
Market cycles do not present the investor with a magical
formula that will time a market upturn to the precise moment.
But what they do afford, in objective fashion, is a means
to quantify the timing of your investment decision. Patience
counts. You may only get two or three really terrific buy
signals in any calendar year, but isn't that enough?
-- Stanley C. Harley is president and portfolio manager of
Harley Capital Management, an investment advisory firm registered
with the California Department of Corporations. The firm provides
discretionary account management as well as consultative services
to institutional managers, individual investors, and traders.
Harley also publishes The Harley Market Letter, a monthly
newsletter that provides advanced technical analysis of stocks,
bonds, and precious metals. Call 484-4258 or e-mail sharley1@verizon.net
with questions or visit www.harleymarketletter.com/. September
2, 2001
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