Cycle Analysis
the lower oversold level. We see the principle of variation in action at point 6
where the price cycle is beginning to fall out of sync with the existing cycle.- OBOS on popular indicators: We may also use overbought and oversold
(OBOS) indications with the window oscillators to identify potential cycles in
the markets. By looking for correspondence between the historical highs and
lows in the oscillator and peaks and troughs in price, the chances of locating
a potential cycle are greatly increased. - Price envelopes: Price envelopes are also extremely effective in isolating cycles
in the market. As we saw in Figure 20.17, a properly tuned price band helps
identify potential cycle peaks and troughs in the market. In Figure 20.24, we
see peaks occurring at the upper moving average percentage band, indicative
of a potential cycle in action. The upper band tests turn out to be peaks be-
longing to a 111‐period cycle on the four‐hour gold chart. It should be noted
that when trying to identify cycles using price bands or envelopes, only arith-
metically scaled charts should be employed. Logarithmically scaled charts will
compress the bands and envelopes at higher price levels and expand them at
the lower price levels, making it very hard to analyze price cycles accurately.
20.6 Chapter Summary
As we have seen, cycle analysis studies the underlying repetitive behavior of price
and market action. Although cyclic behavior is potentially predictive of market
bottoms and tops, there will always be random or unexpected events or forces in
the markets that may upset the periodicity and magnitude of any cycle. It is always
prudent to combine cycle analysis with sentiment readings for a better forecast,
especially in highly emotionally charged market environments.Chapter 20 Review Questions
- Describe the different parts of a cycle.
- Explain cycle translation.
- What is the principle of proportionality?
- Explain how you would calculate the half period of a given cycle.
- What role does a centered moving average play in cycle analysis?
- Describe the five methods for identifying a cycle in the market.
- Explain how cycles may be used to classify reversal and continuation patterns.
- List at least five advantages of using cycle analysis.
rEfErEnCEs
Grafton, Christopher. 2011. Mastering Hurst Cycle Analysis: A Modern Treatment of
Hurst’s Original System of Financial Market Analysis. Hampshire, UK: Harriman House.
Hurst, J. M. 2000. The Magic of Stock Transaction Timing. Greenville, SC: Traders Press.
Millard, Brian J. 1999. Channels and Cycles: A Tribute to J.M. Hurst. Greenville, SC:
Traders Press.
Schumpeter, Joseph. Business Cycles: A Theoretical, Historical, and Statistical Analysis of
the Capitalist Process. Eastford, CT: Martino Publishing.