Cycle Trading

In an article that was posted on Monday, Cramer was quoted as saying: “I have tremendous contempt for this market — it’s a bear market not a correction”

I do not believe that Cramer uses cycle analysis in his approach to the market. Those that do not use cycle analysis can look at a chart of yearly cycle decline and project that it will continue – and that’s where I think he is wrong.

The yearly equity cycle peaked in September, month 7. A monthly swing high formed in October that closed below the 10 month MA to confirm the yearly cycle decline. Then there is more bearish follow through in November that has caused the 10 month MA to turn lower, providing additional confirmation of the yearly cycle decline. Stocks typically form a yearly cycle low every 8 – 14 months. So stocks printing their lowest point in October places them in their timing band for a yearly cycle low.

But a yearly cycle low needs to form when an intermediate cycle low forms. And it looks like the intermediate cycle formed in October.

Stocks printed their previous yearly cycle low in February. After some initial volatility, stocks proceeded to rally to new all time highs in September. Then stocks formed their weekly swing high and began their decline into their intermediate cycle low. 38 weeks places stocks very deep in their timing band to print an intermediate cycle low. The swing low off of the week 38 low signals a new intermediate cycle has begun. Stocks need to close above the declining 10 week MA to confirm.

So far we have discussed:
* Stocks are in their timing band for a yearly cycle low.
* A yearly cycle low needs to form at an intermediate cycle low.
* Stocks appear to have printed their ICL in late October but still need to confirm the new intermediate cycle.

Stocks formed a swing low on Monday off of the day 18 low. Normally 18 days is too early to expect for stocks to print a DCL. But closing below the 10 day MA and turning it lower along with closing below the lower daily cycle band indicates that stocks are declining into their daily cycle low. So now that stocks have formed a daily swing low, if stocks can close above the declining trend line then we will label day 18 as an early daily cycle low.

And if day 18 is confirmed as an early DCL then stocks would have printed a higher low, providing confirmation that week 38 did host the ICL. That would indicate that stocks have begun to rally into a new yearly cycle.