A Closer Look at Near-Term Market Cycles

by Alex Bernal on January 15, 2013

market cycle rotationBy Alex Bernal
Recently I have been doing some non traditional market cycle research for my clients. And, after experiencing success using the Advanced Cycle Platform from Wave59.com, I thought it would be nice to contribute to See It Market by offering up some unique insight into cycle analysis, and what current analysis is telling us about the the financial markets.

Below is a graph of the dominate market cycles within the S&P 500 Index. Click to enlarge.

stock market cyclesSource: wave59.com

It is important to understand that I did not subjectively plot these cycles but have used a proprietary algorithm developed by Lars Von Thienen (posting this chart with his permission), whom I consider one of the utmost experts in the area of cycle analysis. You can read more about his research and software by clicking here.

This dynamic cycle plot indicates two of the strongest cycles that are present in this current market:  The 25-day cycle and the 105 day cycle.  These were primarily chosen because of their strength in amplitude and in periodicity.

Again, like any other technical tool there is no holy grail (that I know of) but this unique perspective tells us a couple things that I think are very important.

  1. We just had a major alignment of the two market cycles at the lows in November. This proved a very strong reversal because they were acting in sync.
  2. You can then see they are somewhat out of sync till about mid February where they both have projected tops.

I personally use the shorter term cycle for timing swing trades where I primarily sell option spreads against the current move. The bottom panel in the chart is a momentum indicator that is optimized by the cycles in the above panels. Reading this like any other momentum indicators, I see a nice divergence which should indicate a near term top.

I will be giving a short web presentation on the fusion of cycle analysis and technical trading systems in a couple weeks. If you would like to attend just shoot me a email at: alex@aetheranalytics.com

Disclaimer: This in no way constitutes investing advice. All of these opinions are my own and I am simply sharing them. I am not trying to convince anybody to do anything with their money. I am simply offering up ideas for the sake of discussion. As always, everybody is expected to do their own due diligence and to ultimately be comfortable with their own investing decisions. Any actions taken based on the views expressed in this blog are solely the responsibility of the user. In no event will Aether Analytics or its owner be liable for any decision made or action taken by you based upon the information and/or opinion provided in this blog.

**Note that any products mentioned in this article are not endorsed by See It Market – review at your own discretion.

Twitter:  @InterestRateArb and @seeitmarket

Author currently is short OTM call spreads in S&P 500 options.

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

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