● Evidence exists for a major 4 year bottom in 2006.
● The supertrend can magnify or negate the effect of cycles.
● The 4 year cycle was obscured by the supertrend from 1985 - 1997.
● The 4 year cycle became more visible as the supertrend weakened (1998).
|Basics of Cyclic Theory (review): Many investors believe that markets are affected by various cycles.
The top of the cycle is called the crest. The bottom of the cycle is called the trough. The time that elapses
between troughs is called the duration. The height of the cycle is called the magnitude (strength). Numerous
cycles may be active at the same time. Their effect is cumulative.
Explanation: The top 3 graphs are a review of the summation of cycles as discussed in the last issue of
SignalTrend's Investment Tips. The next 3 graphs show the effect of combining a supertrend with the cycle
summation graph. Observe the decline from crest to trough on the cycle summation graph on the left. The
crest is marked as "A". The trough is marked as "B". On the supertrend graph in the center, you'll see the
same time period marked with "A" and "B". The cycle summation graph is falling from time A to time B while
the supertrend is simultaneously rising. They nearly offset each other. The combined effect of the cycle
summation graph and the supertrend are shown in the cycles and supertrend graph on the right. The right
graph shows the market moving sideways from point A to point B. If the supertrend had been much stronger,
the right graph would have shown a rising market from point A to point B. As you can see, a Supertrend can
make cycles more difficult to identify. The stronger the supertrend, the harder it is to identify the cycles.
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For example, if the market is tending to form bottoms (troughs) at roughly four year intervals, then cyclic
investors attempt to estimate when the next four year bottom will occur by measuring four years from the last four
year bottom. The projected four year bottom should create a buying opportunity.
This issue of Investment Tips only touched the surface of cyclic theory. But the temptation to expect a major
bottom in 2006 is hard to resist. Market forecasting is a very inexact science. Assuming a margin for error of 8
months, the next major four year bottom could reasonably appear anytime between now and Mid-2007.
The current four year cycle encourages investors to delay establishing bullish positions until the market has
made significantly lower lows. SignalTrend's unemotional computer timing system is still bullish, but it may
change its buy / sell signal in the near future. If that happens, SignalTrend will notify you by email. Remember,
SignalTrend's stock market timing system was backtested 100 years with excellent results!
For a more thorough explanation of cyclic theory, consult The Profit Magic of Stock Transaction Timing, by J. M.
Hurst (1970). In fact, the diagrams above were patterned after his work. Another book to consider is Cycles:
Mysterious Forces That Trigger Events by Edward R. Dewey with Og Mandino.
If you would like to see more information about cycles in future issues of SignalTrend's Investment Tips, just fill
out the "Suggest a topic" form below.
|Basics of Cyclic Theory - Part II
Proprietary Graphs, Tables and Analyses - All Rights Reserved
|Major Historic Cycles: A four year cycle is evident in the following graph of the Dow Jones Industrial
Average. The last issue of Investment Tips showed an obvious 4 year cycle from 1962 - 1982. In 1982 a
supertrend began with great strength. For many years, it concealed the 4 year cycle. The dates in blue below
indicate the 4 year cycle troughs (bottoms). Evidence of the cycle's existence was only slightly visible beginning
in 1990. In fact, one would have to have been looking for it to see it. The 1998 and 2002 bottoms made the
cycle more obvious, probably because the supertrend was running out of steam. The supertrend was possibly
the upward thrust of a decades long super cycle which began forming a crest in 1998. It is interesting to note
that, with the sole exception of 1987, all of the troughs designated below occurred during the second year of a
presidential term. The same tendency existed in the 1962 - 1982 period covered in the previous issue of
Investment Tips. This is highly relevant since we are currently in the eighth month of the second year of a
presidential term, and a conspicuous low has not yet appeared.
|Four Year Cycle in the DJIA (1990 - 2002)