THE HAnDbook of TECHniCAl AnAlysisconfirmation in the near or front month futures contract. The 20‐period cycle is
also harmonically related to 5‐, 10‐, and 40‐period cycles. This is the effect of
cycle nominality and harmonicity in the markets.20.2 Principles of Cycle Analysis
Principle of superposition (summation)
The principle of superposition or summation suggests that the resultant wave
cycle is the sum of all short‐ and longer‐term wave amplitudes, comprising:■ (^) A trend component
■ (^) An oscillatory component
■ (^) A random component
The trend component is usually driven by longer‐term market participation.
The oscillatory component represents the shorter‐term activity driven by medium‐
to short‐term trading activity. The random component accounts for the volatility
surrounding the trend and oscillatory components.
For a more detailed account of the principles of cycle analysis, the reader is
advised to read J. M. Hurst’s excellent book entitled The Magic of Stock Transac-
tion Timing.
The principle of summation helps explain the formation of various chart pat-
terns such as head and shoulders, double tops and bottoms, triangles, rising and fall-
ing channels, and so on. In Figure 20.9, we see that a rising channel formation is the
result of a long‐term trend component being impacted by shorter‐term price cycles.
figurE 20.9 Principle of Summation in Action in the Creation of a Rising Channel.