Cycle Trading

I want to start off by looking at the yearly equity cycle for over the past 11 years.

Over the past 11 years the yearly equity cycle ranged from 7 months to 22 months from trough to trough. The average yearly cycle during that time was 12.8 months. The current yearly cycle stands at month 14. We are getting to the point that the gravitational pull of the impending yearly low will start to take hold. Since August printed a higher monthly high, the earliest a monthly swing high can form will be September.

So at 14 months, August is the current peak to the yearly cycle. The yearly cycle over the past 11 years has peaked on averaged at 9 months. Only one yearly cycle over this time frame peaked greater than 14 months, and that was 16 months back in 2004.

Regression to the mean should begin to exert its gravitational influence as well.

The monthly chart above shows the 20 month Moving Average. I highlight points that got rather stretched. Two points here. First, at 16.4% stretched above the 20MA stocks are primed for a snap back. Secondly, most of the times where prices were stretched to extremes saw price not only tag the 20 MA, but also over shot it.

The yearly cycle normally has two and sometimes three weekly cycles. This is the third intermediate cycle for the year. Therefore it is very likely the terminal intermediate cycle for the yearly cycle. That sets an expectation for this weekly cycle to form as a left translated cycle, peaking before week 10.

This past was week 9 for the intermediate equity cycle. We see that the weekly cycle already has formed a weekly swing high with follow through to the downside. A break below he previous weekly cycle low of 1560.33 delivers a failed weekly cycle and confirms that the yearly cycle is in decline.

So stocks may have printed a daily cycle low last week. If they did not, the timing of the daily cycle suggests they will soon. I expect this new daily cycle to peak on or before day 20 and result in a failed, left translated cycle.

And then we should see the pendulum begin to swing the other way …